MNE3704

FAMILY BUSINESS MANAGEMENT

Ms MS RADEBE
Department of Applied Management
University of South africa
Pretoria

university
of south africa
1© 2023 University of South Africa

2All rights reserved

3Printed and published by:

4The University of South Africa
5Muckleneuk, Pretoria

6MNE3704/1/2025

710051562

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CONTENTS Page

PREFACE vii

Learning unit 1: The nature, importance, and uniqueness of family business 1

1.1 What constitutes a family business? 3
1.2 Succession and continuity (the three-generation rule) 4
1.3 Building family businesses that last 5
1.4 The systems theory perspective 6
1.5 The agency theory perspective 9
1.6 The strategic perspective, the resource-based view and competitive
advantage 10
1.7 The stewardship perspective 11
1.8 Ethics, social responsibility and the family business 11
1.9 Summary 13

Learning unit 2: The family dynamic challenge 15

2.1 Introduction to family dynamics 16
2.2 The stories of two very different family cultures 17
2.3 Zero-sum dynamics and family culture 18
2.4 The family systems perspective 19
2.5 The role of genograms and family messages in helping us
understand the family system 19
2.6 Family emotional intelligence 20
2.7 How families add value to the family business interaction factor 20
2.8 The benefits of family meetings 21
2.9 Family unity and continuity 22
2.10 Planning and policy making 22
2.11 Conflict management. 23
2.12 Summary 24

Learning unit 3: Ownership of an enterprise 25

3.1 Introduction 26
3.2 Shareholder priorities 26
3.3 Responsibilities of shareholders to the company 27
3.4 Effective governance of the shareholder-firm relationship 29
3.5 The role of the board 30
3.6 Information, communication, and education: shareholders 31
3.7 Ownership structure: design and execution 32

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3.8 Summary 33

Learning unit 4: The governance and professionalisation challenge 34

4.1 Introduction 35
4.2 What is family business governance? 36
4.3 Governance for family businesses 37
4.4 Professionalisation challenge and family governance 37
4.5 Blurred systems boundaries 38
4.6 The family council’s contribution to family governance 39
4.7 Family governance: managing the challenges of succession 40
4.8 Summary 41

Learning unit 5: Diagnosing the family business and creating conditions for the
continued spirit of enterprise 42
5.1 Introduction 43
5.2 Outperformance and sustainability in family businesses 43
5.3 Enterprise sustainability: time to call for unity 45
5.4 The twelve elements of strategic fit: the 12s model 46
5.5 Continuing the spirit of enterprise: lessons from centennial
family companies 47
5.6 Role of the board, family council, shareholders and non-family
management in ensuring continuity 48
5.7 Summary 48

Learning unit 6: Transfer of power 50

6.1 Introduction 51
6.2 The ceo as architect of succession and continuity 52
6.3 The ceo exit style and the transfer of power 52
6.4 The unique roles of the ceo spouse 53
6.5 Summary 54

Learning unit 7: G
 overnance of the family business: boards of directors and shareholder
meetings 56
7.1 Introduction 57
7.2 The board of directors 57
7.3 Recruitment and selection 59
7.4 Governance of the business family: family meetings, councils, and
family offices 60
7.5 The family council 61
7.6 Summary 62

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Learning unit 8: Strategic planning and transgenerational entrepreneurship 64
8.1 Introduction 66
8.2 Strategic planning 101 and the family business 66
8.3 Zero-sum family dynamic and strategic planning 67
8.4 Creating value with unique business models 68
8.5 The life cycle of the firm, the family, and the need for parallel
strategic planning 69
8.5.1 Stages of business development 69
8.6 Strategic regeneration: transgenerational 70
8.7 Unique vision of family-controlled companies 71
8.8 Discussion forum activity 72
8.9 Summary 72

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(vi)
 INTRODUCTION
15 Dear Student

We have pleasure in welcoming you to this module on Family Business Management

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(MNE3704) and trust that you will find it a rewarding and interesting area of study.

Family Business Management is becoming increasingly important in South Africa as well

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as in the international community, as more families seek to become independent and

self-sufficient. Although Family Business Management is not a new subject, it has become
more relevant as the process of business transformation continues in the South African
marketplace. In this module we will focus on the factors that enable a family business to
remain successful.

We shall do our best to make your study of this module successful. You will be well on
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your way.

1 PURPOSE OF THE MODULE

The purpose of the learning is to empower you, the learner, with the competencies
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(knowledge, skills, values and attitudes) necessary to optimally utilise your family-owned
or family-controlled business as a way to economic wealth and growth. As a learner, you
will investigate the uniqueness of the relationship between the family and its business.
You will discover the competencies necessary for sound managerial, governance and
family practices. Your newly acquired competencies should increase the likelihood that
your family-owned or family-controlled organisation will continue from generation to
generation, contributing to job creation, personal fulfilment and economic wealth. The
module is delivered via myUnisa, the Internet, peer group interaction, and community
engagement in some of the activities. Your Lecturers will interact with you on myUnisa
and via email.

2 THIS MODULE IS AN UNDERGRADUATE STUDY

Undergraduate degrees in the College of Economic and Management Sciences provide
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graduates with a wide range of knowledge and skills that will equip them to work in
the business community. Graduates who wish to major or specialise in Family Business,
have to learn about all the activities and processes that are required to be a successful
and sustainable family-owned business. This module will introduce you to matters per-
taining to theories that lay foundation to the family business, while introducing you to
the importance of board of directors as well as family councils. This module builds on
a second-year module Corporate Entrepreneurship (MNE3702). While MNE3702 builds
on the heart of entrepreneurial activity and dimensions, MNE3704 will show you the
importance of building family businesses that last based on the ability of the owner to
do a proper transfer. You will also be directed towards gaining insight on the succession
plan and different types of CEOs found in this business. Also, interesting to note that this
module will open up broader opportunities on strategic management of such businesses
through understanding the owner-manager roles. This module provides this interesting

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yet valuable and well sought-after knowledge. This module is one of the five compulsory
modules for students who intend to major in Entrepreneurship.

Moreover, the module will benefit those who are working in the field of management
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(construction), web development, management analysts, appraisers, or assessors of real

estate as well as imports and exports.

3 STRUCTURE OF THE MODULE

For you to succeed in this module, you are advised to start studying early in the semester
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and to work on your assignments at your soonest convenient time. In this module we
promote continuous learning and we want to urge you to make an effort in studying the
study guide together with the prescribed book for the module (the prescribed book will
assist you to study more independently, retain more and attain better outcomes). It will
assist you to study anytime and anywhere. Now and then, you will be directed to the
links that will enrich your knowledge as well as case scenarios that will seek to bridge
the theory and practice. Make use of the study programme, activities, YouTube, videos,
articles, self-assessments and Discussion Forum activities in the study guide and do the
assessments when it is required of you. Read the sections in the prescribed book as in-
dicated in the study guide.

4 MODULE OUTLINE
23 This section presents the outline of the module .

FAMILY BUSI- Learning unit 1: THE NATURE, IMPORTANCE, AND UNIQUE-

NESS MAN- NESS OF FAMILY BUSINESS

Learning unit 2: THE FAMILY DYNAMIC CHALLENGE
AGEMENT

Learning unit 3: OWNERSHIP OF AN ENTERPRISE

Learning unit 4: GOVERNANCE AND PROFESSIONALIZATION

CHALLENGE
Learning unit 5: DIAGNOSING THE FAMILY BUSINESS AND

CREATING CONDITIONS FOR THE CONTINUED SPIRIT OF

ENTERPRISE
Learning unit 6: TRANSFER OF POWER
Learning unit 7: GOVERNANCE OF THE FAMILY BUSINESS:

BOARDS OF DIRECTORS AND SHAREHOLDER MEETINGS

Learning unit 8: STRATEGIC PLANNING AND TRANSGENERA-

TIONAL ENTREPRENEURSHIP

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5 BLENDED LEARNING
24 As a Unisa student, you have to access the myUnisa online module site, where you will
be able to access various online resources to help you in your studies. It is important that
you allocate time to access this online site, which has been designed to give you ample
opportunity to communicate with your lecturer, e-tutor and your fellow students. This is
an important communication platform; you will be required to maintain your visibility as
information will be shared here. The e-learning environment will assist you in collabora-
tive learning, sharing of information, and doing the assessments, and will consequently
enrich your learning experience.

6 PRESCRIBED BOOK
25 The following book is the prescribed book for this module:

Poza, E.J. and Daugherty, M.S. 2018. Family Business. 5th Edition. Ohio: South-Western
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Cengage Learning. ISBN 9780357039212

7 MODULE SUMMARY
28 We wish you all the best in studying the module. Please remember to do the following:

y Study all the learning units in the study guide.

y Study all the sections in the prescribed book as indicated in the study guide.
y Complete all the self-assessment questions.
y Do the assessments in Tutorial Letter 101 as they are linked to the study guide.
y Become involved in the group Discussion Forums (as they count for your assignment
marks).
y Read the articles included in the learning units of the study guide and answer the
questions relating to the articles.
y Watch the YouTube videos included in the learning units of the study guide and answer
the questions relating to the YouTube videos.

29 Kind regards,

30 Lecturer for Family Business Management (MNE3704) module.

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(x)
Learning unit 1
THE NATURE, IMPORTANCE, AND UNIQUENESS OF
FAMILY BUSINESS

32 Study: Chapter 1 of the prescribed book (Poza & Daugherty, 2018)

INTRODUCTION
In this learning unit, we will explore the exciting world of family business, their distinct
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characteristics, the significance they hold in our economy, and the challenges they face in
maintaining their sustainability across generations. By harnessing their inherent strengths,
such as long-term orientation, commitment to local communities, and resilience, family
businesses can play a crucial role in driving economic growth, job creation, and societal
well-being, thereby contributing to the National Development Goal Plans of the country.

Family businesses are a cornerstone of many economies worldwide, accounting for a sub-
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stantial portion of global businesses. What makes them unique is the intertwined nature
of family and business dynamics. One of the key elements in family business is succession
and continuity. As family businesses pass from one generation to the next, the process
of transitioning leadership becomes critical. We will explore the unique challenges and
opportunities that arise during this phase and examine strategies for successful succes-
sion planning. Furthermore, we will examine the factors that contribute to building family
businesses that endure over time. Taking a systems theory perspective, we will explore
the intricate web of relationships, roles, and responsibilities within a family business,
and how they interact with the external environment. By understanding the underlying
dynamics, we can develop strategies to foster harmony, effective communication, and
sustainable growth.

Within the realm of family businesses, three distinct orientations emerge: family first,
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management first, and ownership first. Each perspective brings its own set of challenges
and opportunities, and we will delve into these approaches, exploring their implications
for decision making, governance, and organisational culture.

We will explore the agency theory perspective and examine the potential conflicts of
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interest between family members and how they can be managed. Additionally, we will
investigate the strategic perspective, exploring how family businesses can develop and
execute effective strategies to thrive in competitive markets. The stewardship perspective
will shed light on the importance of responsible leadership, emphasising the long-term
well-being of the family and the business.

Lastly, we consider the ethical and social responsibility dimensions of family businesses,
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with a focus on ubuntu principles. We will explore how these enterprises can balance
profit-making objectives with the well-being of stakeholders, including employees, cus-

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tomers, and the communities in which they operate. By exploring the intricate interplay
between family dynamics, business strategies, and ethical considerations, we aim to
equip you with the knowledge and tools necessary to navigate the complex landscape
of family entrepreneurship.

LEARNING OUTCOMES

y Distinguish family businesses from other types of enterprises.

y Analyse the unique characteristics and dynamics of family businesses.
y Evaluate strategies for successful succession planning in family businesses.
y Explain the interdependence of the three components of the systems theory and
their implications for decision making, governance, and organisational culture.
y Distinguish between the agency theory and the stewardship theory and explain the
relevance in addressing the challenges faced by family businesses.
y Apply the principles of ubuntu in ethical decision-making and social responsibility
dimensions of family businesses.

KEY TERMS

y F amily controlled businesses (FCB): In the ownership approach, a business is defined

as a FCB if a person or family holds at least 20 to 50% of its shares.
y Succession: It refers to the process of transitioning the management and the owner-
ship of a family business​.
y Social responsibility: Corporate social responsibility (CSR) is the concept that a busi-
ness has a responsibility to do good. A company should self-regulate its actions
and be socially accountable to its customers, stakeholders, and the world at large.
y Systems theory perspective: The family systems theory looks at the family, which is
usually relatively closed in interactions between individual members. When a family
owns and runs a business, an open systems view of the family tends to predominate.
y Strategic perspective: As family business owners assess growth initiatives, strategic
planning can help them understand core corporate competencies and allocate
scarce resources.
y Stewardship perspective: At the leadership level, stewards view the family business
as an opportunity to create value and benefit for others (e.g., future generations of
the family; employees; the community) rather than solely an opportunity to build
one’s own personal wealth and power.

38 SCHEMATIC OVERVIEW OF LEARNING UNIT 1

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Figure 1.1: A systematic overview of learning unit 1

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 1.1 WHAT CONSTITUTES A FAMILY BUSINESS?
Reading: Study the section titled “What constitutes a family business” on pages 5 to 6 of
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chapter 1 in the prescribed book (Poza & Daugherty, 2018)

Family businesses are enterprises in which an entrepreneur or next-generation chief

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executive officer (CEO) and one or more family members significantly influence the firm
through their participation, ownership control and strategic preferences, as well as the
culture and values they impart to the enterprise.

Poza and Daugherty (5th edition) adopt an inclusive theoretical definition of a family
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business that focuses on the vision, intentions, and behaviours, vis-à-vis strategy, man-
agement, succession, and continuity of the owners’ control.

For a deeper understanding of what constitutes a family business, watch the YouTube
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video titled “Sage family business story”.

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The animated YouTube video provides a very simplistic storyline of the start-up of a family
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business, the growth phases, the impact of family working together as well as the very
important aspect of succession.

Activity 1.1 What constitutes a family business?

After studying the section above in the prescribed book and watching the YouTube video,
critically compare the information of these two sources. In approximately 200 words, write
your own understanding of what constitutes a family business and the challenges it faces.

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 Feedback on activity 1.1
In your response, you should have considered the following important aspects of family business:

− At what point does an entrepreneur decide to include family in his/her business?

− The impact of family emotions in a family business
− The importance of succession in a family business
You may have noticed that all the references, statistics, and case studies in the rest of
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the prescribed book refer to international examples of family businesses. It is therefore

important to watch the following two parts of a video on “Managing a family business
in Africa”, as this will provide you with insight into the issues that are actively discussed
in South Africa about family businesses. The panel discussion between a CEO of a family-
owned business and two experts on family business examines some of the main concerns
that affect the continuity of a family business.

Managing a family business in Africa:

Part 1: https://www.youtube.com/watch?v=ySzmkTcaljM

Part 2: https://www.youtube.com/watch?v=iHwzBN5-bpA

Activity 1.2 Managing a family business in Africa

The two parts of these YouTube videos deal with South African-based family businesses.
In approximately 250 words, critically analyse the interview and highlight the most critical
issues that dominated the interview.

1Feedback on activity 1.2

Have you considered the following:

− What makes family different from a normal business?

− Succession and its relation to competence
− What shareholders expect of the management of a family business
This learning unit provided the background of what constitutes a family business. In the
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next section, succession and continuity are discussed with specific focus on the “three-
generation rule”.

1.2 SUCCESSION AND CONTINUITY (THE THREE-GENERA-

TION RULE)
49 Reading: Page 7 in the prescribed book (Poza & Daugherty, 2018)

In this section, the critical issue of succession and continuity of the family business is dis-
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cussed. According to the three-generation rule for family businesses, often described by
the adage 'shirtsleeves to shirtsleeves' in three generations, the third generation cannot

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manage the business and wealth they inherit, so the company ultimately fails, and the
family’s wealth disappears with its failure. Emphasis is placed on the “three-generation
rule”. The important factor is, however, to ensure continuity – and not whether a family
business lasts 90 years or three generations. There are multiple reasons why organisations
fail, but in family-owned and family-controlled companies, the most prevalent reason
relates to a failure in succession planning.

For another perspective on the “three-generation rule”, you are required to read the
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article: “Do most family businesses really fail by the third generation?”, by Josh Baron
and Rob Lachenauer. Click on the link below:

52 https://hbr.org/2021/07/do-most-family-businesses-really-fail-by-the-third-generation.

Activity 1.3 The three-generation rule of a family business is “nonsense”

This article is based on the opinions of Josh Baron and Rob Lachenauer. You are required
to read this article and compare it with the opinion given in the prescribed book (Poza
& Daugherty, 2018). After studying both, in approximately 250 words, critically analyse
the communalities and identify the differences in opinion of these writers.

2Feedback on activity 1.3

Have you considered the following?

− Where did the three-generation rule originate?

− What are the findings of another researcher regarding the three-generation rule?
− What is the role of succession planning in the continuity of family businesses?
In this section, the issues related to succession and continuity in family-owned businesses
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were addressed and different viewpoints were interrogated. This all culminates into the
next section, which relates to building a family business that lasts.

1.3 BUILDING FAMILY BUSINESSES THAT LAST

54 Reading: Page 7 in the prescribed book (Poza & Daugherty, 2018)

In this section, we examine the criteria related to protecting the core of the family busi-
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ness and adapting it to a changing and competitive environment.

The reasons for the failure of family-owned businesses, specifically in South Africa, have
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been deliberated by various authors. The research of one of these authors (Maas, 2019:274)
has shown that the biggest concern is the level of family business management skills.
Most family business owners are simply not trained to manage their businesses success-
fully – either business-wise and/or family-wise.

In the following YouTube video, an international speaker, Vikram Bhalla, enthusiastically

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discusses the ability to build family businesses that last:

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58 https://www.youtube.com/watch?v=suL-HkP-2Ts.

Activity 1.4. Vikram Bhalla: Family businesses are here to stay and thrive

After studying page 7 of the prescribed book, you are required to listen to the YouTube
video on the results of research done by Vikram Bhalla on family-owned businesses,
mostly in India, Europe and East Asia. Critically analyse both sources and in a summary
of approximately 250 words, identify the communalities between the authors of the two
publications.

Feedback on activity 1.4

Have you considered the following:

− Are there any differences between the sustainability of a family-owned business and
that of a normal commercial business?
− Family businesses are the fastest growing industry in emerging markets.
− The role of the family in family businesses has increased over time.
− Family businesses who are in business for long periods of time create trust with clients,
banks, and suppliers.
− Stewardship – creating a sense of value and purpose other than being green and
making a profit.

This section emphasises the importance of creating a family business that lasts. In the next
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section, the systems theory approach is discussed. The physical management of family
is modelled and comprises of the three overlapping, interacting, and interdependent
subsystems of family, management, and ownership.

1.4 THE SYSTEMS THEORY PERSPECTIVE

60 Read: Page 8 in the prescribed book (Poza & Daugherty, 2018)

In this section, we critically analyse the systems theory, which is the theoretical approach
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most often used in the scholarly study of family businesses. It remains pervasive in the
literature today.

The family systems theory examines the family, which is usually relatively closed in inter-
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actions between individual members. When a family owns and runs a business, an open
systems view of the family tends to predominate. It emphasises the interaction of the
family within the business. The three-circle model is generally accepted as the standard
model for family businesses and includes family, business, and ownership as the three
main components.  

The following YouTube video with the title, “The three-circle model explained. Under-
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standing the family business system”, provides a basic overview of this theory:

64 https://www.youtube.com/watch?v=JO0p8zRZSWg.

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 Activity 1.5 The three-circle model explained. Understanding the family
business system

After studying page 8 of the prescribed book, listen to the YouTube video on the three-
circle model. The video focuses specifically on the seven different segments of owner-
ship in a family business. In approximately 250 words, critically analyse both sources and
draft an inclusive summary of all the facts related to the systems theory perspective on
family business.

Feedback on activity 1.5

In your response, have you considered some of the following important points?

− Explaining the three-circle model

− The seven different segments of ownership in a family business
− What common perspective does the family members of the seven segments share?
Within the systems theory perspective, you would notice that family businesses are fur-
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ther categorised as illustrated in figure 1.2 below:

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Figure 1.2: The systems theory model of family businesses

This model illustrates the three interdependent and overlapping groups that comprise
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the family business system: (i) family; (ii) management; and (iii) ownership. Being a sys-
tem means that what happens in one group (or circle) influences the others. If you make
a change in one circle, expect a ripple effect in the other two circles. If one circle is stalled
or in conflict, it can affect the performance of the other two circles and of the entire fam-
ily business system. On the other hand, a high-performing circle can help to bolster the
other two circles and strengthen the overall system. By its nature, being a system leads
to increased complexity in a family business, compared to a non-family business.

68 Let us now examine each of the components.

y Family-first businesses

69 Reading: Page 9 in the prescribed book (Poza & Daugherty, 2018)

7 MNE3704/1
In family-first family businesses, employment in the business is a birth right. The stereo-
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type of nepotism, which still dominates most people’s views of family businesses, derives
from this not-so-infrequent suboptimisation of the family-business system.

Family first – family-first companies generally emphasise the needs of the family over
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what is best and most productive for the business. There usually are no set boundaries
between family issues and business issues. Only family successors – family members –
have a strong emotional attachment to the business. The following YouTube video draws
a comparison between family-first and business-first family businesses:

https://wealthpoint.net/blog/family-first-vs-business-first/#:~:text=Family%20First%20
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%E2%80%93%20Family%20first%20companies,emotional%20attachment%20to%20
the%20business.

Activity 1.6 Family-first businesses versus business-first businesses

Click HERE to complete discussion activity 1.6.

In approximately 250 words, compile information that differentiates family-first businesses

from a business-first business.

3Feedback on activity 1.6

Have you considered the following?

− Family-first companies generally emphasise the needs of the family over what is best
and most productive for the business.
− There usually are no set boundaries between family issues and business issues.

The next sub-system of system management, namely management first, will be discussed
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next.

y Management-first businesses

74 Reading: Page 10 in the prescribed book (Poza & Daugherty, 2018)

In management-first family businesses, the performance of employed family members is

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reviewed in the same manner as the performance of non-family managers, and human
resource policies generally apply equally to family and non-family employees. In the
YouTube video you watched in the previous section, a comparison between family-first
and business-first family businesses was drawn.

The last of the three sub-systems of system management, namely ownership first, will
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be discussed next.

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y Ownership-first businesses

78 Reading: Page 10 in the prescribed book (Poza & Daugherty, 2018)

Poza and Daugherty (2018) highlight the challenges facing ownership-first family busi-
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nesses and the impact of demands for higher return from family members, ultimately
affecting the profitability of the business and creating conflict between family members.
In an article in the Harvard Business Review, the view is expressed that these types of con-
flicts can be addressed by using one of the five basic ownership models, namely owner/
operator, partnership, distributed, nested, and public ownership models. Understanding
each model’s implications and trade-offs finally allowed the owners to start having calm
discussions about what ownership meant for them, making compromise possible.

These five basic ownership models are discussed in detail in the article “Corporate gov-
80

ernance. The 5 models of family business ownership”, which are providing solutions to
the problems that ownership-first businesses face. Click on the following link to access
this article:

81 https://hbr.org/2016/09/the-5-models-of-family-business-ownership.

Activity 1.7: The five models of family business ownership

After studying page 11 of the prescribed book, you are required to watch the YouTube
video, “Corporate governance. The 5 models of family business ownership”. Critically com-
pare and analyse challenges identified in the prescribed book and in the article of owner-
first family businesses. Upon completion, measure the advantages of the five models of
family ownership against the challenges faced by owner-first family businesses. Critically
analyse the outcome of this measurement to prioritise the five models from most likely
to least likely to address the challenges facing owner-first businesses.

Feedback on activity 1.7

In prioritising the five models of family ownership, did you consider the following:

− the impact of investors interfering in the effective running of the family business
− the effect of second-guessing family members in management
− the advantages of the five different ownership models
In the next section, the second perspective, namely the agency theory perspective, will
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be discussed.

1.5 THE AGENCY THEORY PERSPECTIVE

83 Reading: Page 11 in the prescribed book (Poza & Daugherty, 2018)

The agency theory perspective advises family firms to structure governance mechanisms
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that monitor and incentivise the checking of opportunistic behaviour, shirking responsibil-
ity or free riding. This minimises agency costs, thereby improving the firm’s performance.

9 MNE3704/1
Traditionally, the agency theory has argued that the natural alignment of owners and
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managers (the agents) in a family business decreases the need for formal supervision of
agents and for elaborate governance mechanisms, thus reducing agency costs of own-
ership in family firms. This research stream further suggests that as owners rely more on
agents (or as family firms are increasingly run by non-family managers), their overall total
cost will increase.

Activity 1.8 The agency theory

Watch the YouTube video “Corporate governance: The agency theory” at

https://www.youtube.com/watch?v=K-veJE85HVE.
In approximately 250 words, share with your colleagues your response to the following
prompts:

y How did the video enhance your understanding of the concept?

y Were there any aspects that surprised you or challenged your previous assumptions
about the agency theory?
y Discuss any new insights or perspectives you gained from watching the video.

4Feedback on activity

Have you considered the following in your response?

− the agency theory perspective

− agency cost
− outsourcing
− non-family members running the business

1.6 THE STRATEGIC PERSPECTIVE, THE RESOURCE-BASED

VIEW AND COMPETITIVE ADVANTAGE
86 Reading: Pages 12 to 15 in the prescribed book (Poza & Daugherty, 2018)

The competitive advantages inherent to family businesses are best explained by the
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resource-based view of organisations.

Study the cases studies in the prescribed book for a detailed overview of the following
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three perspectives:

y the strategic perspective

y the resource-based view
y competitive advantage

The resource-based view (RBV) of competitive advantage provides a theoretical framework

89

from the field of strategic management for assessing the competitive advantages of fam-
ily firms. In the following YouTube Video, “Resourced-based view and internal analyses”,

10
the lecturer not only emphasises the theory in the prescribed book, but also provides
additional information which will ensure a better understanding of the perspective. Click
on the following link to access the YouTube video:

90 https://www.youtube.com/watch?v=OANVFT3CcDs.

1.7 THE STEWARDSHIP PERSPECTIVE

91Reading: Pages 15 to 18 of the prescribed book (Poza & Daugherty, 2018)

The stewardship perspective is based on the humanistic model, which considers man-
92

agers as stewards with an intrinsic desire to serve the firm and thus, naturally align with
the principal (owner).

93 Read the following article which is licenced by Creative Commons:

94 https://ojs.wsb.edu.pl/index.php/fso/article/view/442.

Owala, R, & Duháček Šebestová, J. 2021. Using stewardship and agency theory to explore
95

key performance indicators of family businesses. Forum Scientiae Oeconomia, 9(4):9–30.

https://doi.org/10.2376.

This article explores the potential of the agency theory and the stewardship theory in
96

family businesses by addressing family business challenges.

Activity 1.9: Distinction between the agency theory and the stewardship
theory

Read: Pages 11 to 12 for background on the agency theory and the stewardship theory;
page 13 of the article for the summary of both theories.

In approximately 250 words, distinguish between these two theories.

1.8 ETHICS, SOCIAL RESPONSIBILITY AND THE FAMILY

BUSINESS
97 Reading: Pages 18 to 19 in the prescribed book (Poza & Daugherty, 2018)

Let us now turn our attention to how family businesses can apply ubuntu principles
98

to guide their ethical decision-making processes and fulfil their social responsibility to
the community. We will explore practical strategies and examples that showcase the
integration of the ubuntu philosophy in promoting ethical conduct and social impact
within the family business context.

y Implementing ubuntu principles in ethical decision making and social respon-

sibility within family businesses

11 MNE3704/1
Ubuntu is an African philosophy that highlights the importance of interconnected-
99

ness, compassion, and communal values in our lives.

Ethics: When it comes to ethics, ubuntu teaches us that ethical conduct in a family busi-
100

ness goes beyond individual actions. It reminds us of our connection to the community
and encourages us to make decisions that are fair, honest, and filled with integrity. Ubuntu
reminds family businesses to consider the broader impact of their choices and prioritise
the well-being of both the family and the community they serve.

Social responsibility is another key aspect influenced by ubuntu. It emphasises our

101

responsibility as family businesses to contribute positively to our communities. Ubuntu

encourages us to recognise our interconnectedness and actively engage in initiatives that
address societal challenges. Whether it is through job creation, sustainable practices, or
initiatives that improve the overall well-being of the community, ubuntu reminds us that
we are all in this together.

Now, let us look at philanthropy. Ubuntu teaches us that philanthropy is not just about
102

giving money. It is about showing compassion and solidarity with those in need. Ubuntu
inspires family businesses to engage in philanthropic efforts that go beyond financial
contributions. It encourages us to understand the needs of our community, collaborate
with local organisations, and empower individuals and groups to build a better future.
Ubuntu reminds us that by helping others, we uplift ourselves.

In ubuntu, the family business is seen as more than just a means of accumulating wealth.
103

It is a vehicle for communal prosperity. Ubuntu encourages us to create an inclusive and

collaborative environment within our family businesses, to value the well-being and de-
velopment of our family members, employees, and the wider community. By fostering
trust, shared decision making, and collaboration, ubuntu helps us build stronger family
businesses that have a positive impact on everyone involved.

You should now realise that ubuntu emphasises interconnectedness, compassion, and com-
104

munal values, and it can shape ethical conduct, social responsibility, and decision making
within a family business.

Activity 1.10: Creating a scenario of ubuntu principles in family business

Click HERE to complete this activity.

Develop a scenario that demonstrates the implementation of ubuntu principles in a fam-
ily business context. This activity requires you to think critically about how the ubuntu
philosophy can influence decision making, relationships, and social responsibility within
a family business setting.
You need to think beyond traditional business scenarios and consider various aspects
such as ethics, social responsibility, collaboration, and community impact.
Include the following elements in the scenario:

y Characters: Introduce key family members involved in the business, highlighting their
roles, relationships, and values.

12
 y Ethical dilemma: Present an ethical dilemma or challenge that the family business
encounters. This can be a situation where ethical principles are tested, and different
perspectives arise within the family.
y Application of ubuntu principles: Describe how the characters in the scenario apply
the ubuntu principles to resolve the ethical dilemma. Encourage students to consider
how the ubuntu principles can influence decision making, communication, and conflict
resolution within the family business.
y Social responsibility: Illustrate how the family business demonstrates social responsibil-
ity in their actions. This can include initiatives or projects that have a positive impact
on the community, stakeholders, or the environment.

Scenario presentation: Present your scenario in the discussion forum. Share the key ele-
ments of the scenario, explain how ubuntu principles are integrated, and discuss the
outcomes and lessons learned from the fictional family business situation.
In your analysis, consider the following:

y How did the implementation of ubuntu principles contribute to resolving the ethical
dilemma in the scenario?
y What were the positive impacts of applying ubuntu principles on the family business
and the community?
y What challenges or conflicts arose during the scenario, and how were they addressed
using ubuntu principles?
y How can the scenario you created inspire real-life applications of ubuntu principles in
family businesses? Think about the potential benefits and challenges of implement-
ing ubuntu principles and how they can contribute to a more ethical and socially
responsible family business environment.

1.9 SUMMARY
Read the summary at the end of chapter 1 (Poza & Daugherty 2018). In this learning unit,
105

we defined the family business and explained five theoretical approaches to understanding
the family business, as well as several advantages and disadvantages of family businesses.
In the next learning unit, we will explore the role of family dynamics. Please complete
the assessment activities in chapter 1 of the prescribed book. The additional reference
material listed below will provide a deeper understanding of family-owned businesses.

ADDITIONAL REFERENCES
To enhance your understanding of the content discussed in learning unit 1, visit the fol-
106

lowing websites as they contain interesting information and examples about the content
discussed:

107 Family-owned businesses

108 https://www.inc.com/encyclopedia/family-owned-businesses.html

109 Characteristics of family-owned businesses

110 https://www.gma-cpa.com/blog/characteristics-of-successful-family-owned-businesses

13 MNE3704/1
111 What is a family-owned business and what is its importance?

https://www.referenceforbusiness.com/encyclopedia/Fa-For/Family-Owned-Businesses.
112

html

113 What ensures a successful family business?

114 https://hospitalityinsights.ehl.edu/running-successful-family-business

115 Why family businesses fail to implement succession planning

116 https://www.youtube.com/watch?v=sy12bsHSEwc

117

14
Learning unit 2
THE FAMILY DYNAMIC CHALLENGE

118 AIM OF LEARNING UNIT 2

Learning unit 2 focuses on chapter 2 in the prescribed book (Poza & Daugherty 2018).
119

The aim of learning unit 2 is to provide you with insights on how family-owned or
family-controlled business can be used optimally for economic wealth and growth. You
will investigate the uniqueness of the relationship between the family and its business.
Furthermore, you will discover the competencies necessary for sound managerial, gover-
nance and family practices. The newly acquired competencies should increase the likeli-
hood that family-owned or family-controlled businesses will continue from generation
to generation and contribute to job creation, personal fulfilment, and economic wealth.

LEARNING OUTCOMES

y Analyse the complexities of family dynamics (zero sum) and culture.

y Evaluate the impact of family dynamics on the strategic behaviour and daily opera-
tions of the family business.
y Discuss the applicability of the family systems theory perspectives in ensuring the
sustainability and continuity of family-owned businesses.
y Examine the importance of family emotional intelligence to a family in business.
y Critically discuss the benefits of family meetings and interactions in businesses.
y Demonstrate the importance of family unity in family business continuity.
y Critically discuss the importance of planning and policy making in the effective
functioning of family businesses.
y Recognise the importance of conflict management in family businesses.

KEY TERMS

For you to be able to navigate through this unit with minimal challenges, it is important
to understand the following important key concepts and their meaning as they are used:

y Family culture – family tradition, also called family culture, is defined as an aggre-
gate of attitudes, ideas and ideals, and environment, which a person inherits from
his/her parents and ancestors.
y Zero-sum dynamics – the concept of a zero-sum game comes from the game theory
and describes a division of a fixed amount of resources between each participant,
in such a way that one player can only win what the other players lose.
y Genograms – a genogram is a pictorial display of a person’s family relationships
and medical history. It goes beyond a traditional family tree by allowing the user to
visualise hereditary patterns and psychological factors that punctuate relationships.
y Family unity – a right to family unity is inherent in recognising the family as a group
unit. The right to marry and found a family also includes the right to maintain a fam-
ily life together. The right to a shared family life draws additional support from the
prohibition against arbitrary interference with the family.

15 MNE3704/1
 y  amily business continuity – business continuity is particularly important for the
F
leaders of family enterprises, because when a family business is put at risk, so is the
family legacy.

120 SYSTEMATIC OVERVIEW OF LEARNING UNIT 2

Below is a schematic overview of learning unit 2.
121

122

Figure 2.1: A systematic overview of learning unit 2

2.1 INTRODUCTION TO FAMILY DYNAMICS

Reading: Page 26 of chapter 2 in the prescribed book (Poza & Daugherty 2018) for the
123

introduction to family dynamics

In this learning unit, you will be introduced to family dynamics within different family
124

cultures. Thereafter you will learn about the family systems theory and its implication
for family businesses. The role and importance of family emotional intelligence and fam-
ily interaction are also examined. Finally, conflict management is discussed. To get you
started, let us first examine what family dynamics entail. After reading the case study of
Rob Beardon, you would have a better idea of what constitutes family dynamics.

Activity 2.1 Understanding family dynamics

Complete the activity in the Discussion Forum. In approximately 150 words, how do you
define “family dynamics”. Share with your colleagues some common dynamics you observe
in your work with business families, for example, sibling dynamics, or parent-child dynamics.

16
 Alternately, you may analyse the case study of Rob Beardon. Identify and critically discuss the
dynamics within the family.

5Feedback on activity 2.1

In your definition you should have mentioned:

− the impact of the lack of information

− the impact of low levels of family intelligence
− the impact of little knowledge of the business
Learning unit 2 provides the case studies of two different family cultures. This will provide
125

insight into the realities of family cultures and relationships in family businesses.

2.2 THE STORIES OF TWO VERY DIFFERENT FAMILY

CULTURES
Reading: Page 27 on the two very different family cultures
126

Activity 2.2 Case study of family dynamic challenges.

This is a Discussion Forum activity. These stories illustrate two vastly different family
cultures with its own family dynamics.

2.2.1 R
 ead and analyse the case studies of the Bingham’s and the Louisville Courier-
Journal Companies.

y Now share with your fellow students in the Discussion Forum what you consider to
be the most important factor that prevented the families from coming together after
the sales of the business.

2.2.2 Read and analyse the Blethens and the Seattle Times Company.

y Now share in the Discussion Forum (in approximately 200 words) what in your opinion
contributed to the success of the businesses.

6Feedback on activity 2.2

In the first case study, have you identified and discussed any of these factors?

− the absence of a board with independent outsiders

− lacking spousal leadership
− the emotional distance between the adults of the two generations

17 MNE3704/1
 In the second case study, have you identified and discussed any of these factors?

− the need to value the extended family value over the individual family branch
− the importance of family council meetings
− preparing the next generation for stewardship and family unity
127 The next section provides an overview of zero-sum dynamics and family culture.

2.3 ZERO-SUM DYNAMICS AND FAMILY CULTURE

128 Reading: Page 29 of chapter 2, the section on zero-sum dynamics and family culture

Family businesses are known for their strong, distinctive cultures, cultures that are often
129

heavily influenced by the vision, style and values of the founder and carefully maintained
through the generations.

These cultures bind employees to a common cause and foster loyal and stable work-
130

forces. If managed well, a strong culture can prove to be a major competitive advantage
for a family business seeking to attract and retain the best talent to achieve sustainable
long-term goals. However, even though these strong, distinctive cultures prove to be a
major competitive advantage for a family business, it does happen that there is a decline
in these relationships. This phenomenon is called zero-sum dynamics.

Zero-sum dynamics happen when the family business stops growing or is in decline. A
131

zero-sum dynamic in a relationship occurs when the one party’s perceived gain is the
other party’s perceived loss. This results in a so-called “us-versus-them” dynamic triggered
by perceived differences. Watch the video, Zero sum game, for a basic explanation of
zero-sum dynamics: https://youtu.be/B2NxMr9Kf7w.

Activity 2.3 Zero sum dynamics

After studying the prescribed theoretical reading material and listening to the simplified
version on family dynamics, you are required to critically analyse the complexities of family
dynamics (zero sum) and culture. Draft in approximately 250 words a summary of your
understanding of the concept specifically related to a family business.

7Feedback on activity 2.3

In your response, you should have considered the following important aspects:

− the impact of zero-sum dynamics in the family hierarchy

− the impact on family dynamics
132 Next, we will turn our attention to family systems perspectives.

18
 2.4 THE FAMILY SYSTEMS PERSPECTIVE
133 Reading: Page 30 of chapter 2 in the prescribed book

Extensive research on family firms is underpinned by the systems theory, which, at the
134

broadest level, focuses on viewing the world in terms of the interrelationships of objects
with one another. We are accustomed to the idea of a business acting as a system, which
may be seen as open or closed. The following study briefly explains in a nutshell the
important theories about the nature of family firms and how they differ from non-family
firms. Refer to the model of the systems theory by clicking here.

Activity 2.4

In an essay of approximately 1000 words, critically discuss the applicability of the family
systems theory perspectives in ensuring the sustainability and continuity of family-owned
businesses.

8Feedback on activity 2.4

Have you considered the points mentioned in the guidelines for the essay?

− Identify and discuss the principles underpinning the family systems theory perspectives.
− How do the principles contribute to the sustainability and continuity of family-owned
businesses?
− Discuss the applicability of the three inter-related factors (family, ownership, and
business).

Next, we will discuss the role of genograms and family messages in helping us understand
135

the family system.

2.5 THE ROLE OF GENOGRAMS AND FAMILY MESSAGES IN

HELPING US UNDERSTAND THE FAMILY SYSTEM
136 Reading: Page 32 of chapter 2 in the prescribed book

To explain this chapter, a few questions need to be asked: What is a genogram? Why
137

should I use one? What is in a genogram? To start off, a genograms, much like family trees
or organisational charts, are graphic representations of family systems. They can depict
relationships or histories in greater detail than family trees, allowing users to visualise
hereditary patterns and psychological factors inherent in relationships. The following
video will provide sound and simplistic examples of how to create a genogram. To gain
better insights on the definition of a genogram and how they can help you understand
your family patterns, click on the URL link.

19 MNE3704/1
 Activity 2.5 Creating a genogram

Use the technique provided in the UR link to create a genogram of your own family.

9Feedback on activity 2.5

In your response, you should have compiled a genogram of your own family, keeping the
family business structure in mind.

Now we turn towards the discussion of family emotional intelligence.

2.6 FAMILY EMOTIONAL INTELLIGENCE

138 Reading: Page 33 of chapter 2 in the prescribed book

The concept of emotional intelligence refers to the capacity for recognising our own feel-
139

ings and those of others and the ability to manage our emotions and our relationships
with others. Emotionally healthy families understand the importance of both setting and
respecting boundaries. They set firm but healthy limits and have clear expectations around
behaviour – their own and others. They understand the importance of communicating
these boundaries with empathy and respect. You are required to watch this video.

Activity 2.6 Importance of emotional intelligence

After studying the prescribed material and listening to the video, critically analyse the
content and explain in approximately 250 words, the importance of family emotional
intelligence to a family in a business.

10 Feedback on activity 2.6

In your response, you should have discussed the four primary emotions involved in emotional
intelligence.

Let us now look at how families add value to the family business interaction factor.

2.7 HOW FAMILIES ADD VALUE TO THE FAMILY BUSINESS

INTERACTION FACTOR
140 Reading: Page 36 in the prescribed book

A family business with a high degree of family harmony tends to be more effective in
141

planning for business continuity. Such harmony exists when family members share val-
ues of accommodation and cooperation and handle conflict appropriately. Tolerance of
differences, the extent to which a family constructively tolerates differences of opinion

20
and outlook on sensitive issues, is another construct that has proven useful in under-
standing family dynamics and a family’s relationship to the business. It represents the
quality and the nature of communication within a family. The following UR link contains
an interesting discussion on values and their importance in family businesses: https://
youtu.be/H1fBPBtLcxU.

Activity 2.6 Values and their importance in family businesses

Listen to the YouTube video above and in approximately 150 words, critically analyse the
content related to values and their importance in family businesses.

11Feedback on activity 2.6

In your response, you should have considered the importance of family values in the family
business.

In the next section, we discuss the benefits of family meetings.

2.8 THE BENEFITS OF FAMILY MEETINGS

Reading: Page 36 in the prescribed book
142

Family meetings are events that can help set long-term goals, ensure transparency, de-
143

fine roles, and help connect family members across generations in order to understand
the responsibility and management of their wealth. Family meetings are effective as a
bonding experience, as well as to improve communication among all family members.
Watch the video titled, Family business meetings for a very simplistic view of the value
of family business meetings: https://youtu.be/fu9gzfdjfLI.

Activity 2.7 Family business meetings

After reading chapter 2 in the prescribed book, you are required to listen to the video
and in approximately 250 words, critically discuss the benefits of family meetings and
interactions in businesses.

12 Feedback on activity 2.7

In your response, you should have considered the impact of the absence of family business
meetings.

144 Next, we will discuss family unity and continuity.

21 MNE3704/1
 2.9 FAMILY UNITY AND CONTINUITY
145 Reading: Page 37 in the prescribed book

Family unity is the defining element in the relationship between the owning family and
146

the business. Therefore, family unity affects the firm’s ability to capitalise on the unique
capabilities and/or resources that family members bring to the company’s business model.
Thus, it helps the company to translate core competencies into a unique set of competitive
advantages. The degree of family unity, how the family perceives business opportunities,
and how positive the relation is between firm and family all influence the managerial
practices used and the extent of their use of planning activity, performance feedback,
succession planning disclosure, advisory boards, and family meetings. This video provides
insight into managing a family business in Africa.

Activity 2.8 Family unity and continuity

After studying the theoretical information in the prescribed book, listen to the video on
practical issues related to family unity and continuity. Upon completion, critically analyse
the content of both resources and in approximately 250 words, demonstrate the impor-
tance of family unity in family business continuity.

Feedback on activity 2.8

13

In your response, you should have considered those aspects related to family unity and con-
tinuity that is beyond the control of the family.

147 We now turn our attention to planning and policy making.

2.10 PLANNING AND POLICY MAKING

148 Reading: Pages 38 to 44 of chapter 2 in the prescribed book

Open and safe processes for sharing information among family members in family
149

council meetings are prerequisites for effective planning and policy making by family
groups. Because many family-controlled companies, for understandable reasons, decide
to create a family council to dismantle the culture of secrecy established by the previ-
ous generation, a gradual evolution is best. Initially, decision making should be limited
to less divisive projects such as writing the family history, planning family outings, and
identifying ways to educate family members regarding the business. As time goes on,
the family council can tackle some of the more challenging aspects of owning a business
together, such as family employment and family board seats. This outcome is often not
immediately achievable.

22
 Activity 2.9 The importance of planning and policy making

You are required to study the theoretical information of the importance of planning and
policy making and in approximately 250 words, critically discuss the importance of plan-
ning and policy making on the effective functioning of a family business.

14 Feedback on activity 2.9

In your feedback, you should have covered the usefulness of the various policies that can be
implemented in families businesses.

150 Lastly, we turn to conflict management in the family business.

2.11 CONFLICT MANAGEMENT

151 Reading: Page 45 in the prescribed book

The two greatest threats to the successful continuity of family businesses are conflict
152

and succession. Conflicts in family businesses are rarely caused by poor business per-
formance; most conflicts arise because the family owners perceive that their needs
are not met. Conflict is inevitable in families, especially when the families live, work
and control assets together. In the link below, the critical role a family council can play
in reducing the potential for conflict is explained: https://pressbooks.library.upei.ca/
smallbusinessmanagement/chapter/family-businesses/.

Activity 2.10 Benefits of family meetings

This is a Discussion Forum activity on the Moodle platform.

In approximately 200 words, critically discuss the benefits family meetings bring to families
in business. Use practical examples to explain how family meetings could prevent conflict.

15 Feedback on activity 2.10

In your response, you should have considered the following important aspects:

− the role of the family members

− the role of the family council
− how conflict in a family business can be reduced
23 MNE3704/1
 2.12 SUMMARY
In this learning unit, the family’s influence on a family business is highlighted. An in-depth
153

understanding of this topic goes a long way towards promoting more creative solutions
to the unique challenges posed.

In the next learning unit, we will look at the structure of ownership of a family firm that
154

lasts.

155

24
Learning unit 3
OWNERSHIP OF AN ENTERPRISE

156 AIM OF LEARNING UNIT 3

157 Kindly note the instruction: Study chapter 3 of the prescribed book.

The aim of learning unit 3 is to evaluate the impact of an ownership structure on family
158

businesses. The substantial influence of the family business is its ownership and control
structure in the fields of finance, management, and family business, which remains unex-
plored and misunderstood. Although several studies have shown that family-controlled
firms can enjoy better financial performance than management-controlled firms, it remains
crucial to understand the impact of the entitlement culture of next-generation members
on the future of the family business.

Maintaining unity and a realistic assessment of business and career opportunities among
159

family members and shareholders in this situation remains a challenge. In conclusion, it

is important for you to have a clear understanding of the consequences of shareholder
disagreements regarding compensation, dividends, liquidity, return on investment,
business strategy, financial results, the estate plan, and management on the future of
family companies.

LEARNING OUTCOMES

y S uggest strategies to promote responsible ownership behaviour by family members

in a family company.
y Identify and critically discuss the primary responsibilities of shareholders towards
the corporation they own.
y Analyse the effectiveness of ownership structures in different generations.

KEY TERMS

You will need to understand the following key concepts in order to attain the learning
outcomes for the topic:

y shareholder priorities
y shareholder equity
y reasonable returns
y owner-manager alignment
y effective governance
y shareholder-firm relationship
y role of the board
y shareholder meetings
y ownership structure
y classes of stock

25 MNE3704/1
160 SCHEMATIC OVERVIEW OF LEARNING UNIT 3
Below is a schematic overview of learning unit 3.
161

162

Figure 3.1: A systematic overview of learning unit 3

3.1 INTRODUCTION
163 Reading: Page 48 of chapter 3 in the prescribed book (Poza & Daugherty 2018)

In family firms, ownership is sometimes used interchangeably with words like money
164

and wealth. This chapter will use the term ownership primarily to refer to company share
ownership and the corporate control exercised by shareholders.

While family-controlled firms have been shown to outperform management-controlled

165

firms in terms of return on equity and shareholder value creation, governing the relation-
ship between family owners and the firm continues to be a unique challenge to family-
owned and family-controlled firms. A vicious cycle appears to easily take hold in family
firms beyond their first generation, when owners are not always owner-managers. The
cycle is precipitated by family members who are only shareholders and receive insuf-
ficient information and often lower economic returns from the firm than their relatives,
who are employed as managers of the firm.

3.2 SHAREHOLDER PRIORITIES

166 Reading: Page 49 of chapter 3 in the prescribed book

The sensible priorities of shareholders include risk-adjusted economic returns captured

167

in shareholder value and dividends or distributions. Family members may also be inter-
ested in noneconomic outcomes, like identity, reputation, and the ability to carry out

26
philanthropic initiatives. Family shareholders expecting to fulfil their responsibility of
aligning management interests with shareholder priorities and holding management
accountable need a thorough understanding of financial statements. They must be able
to make sense of what the numbers say about the firm and its competitive condition.

Financial literacy is, therefore, essential knowledge for every shareholder, not just the
168

ones active in the management of the company. Without it, the desirable alignment of
management and shareholders is at risk. Without it, family-business shareholders can
easily become just as indifferent or impatient, fickle, and greedy as investors on Wall
Street. As part of their financial literacy, owners should also be able to understand the
capital structure of the firm, know debt levels in relation to owners’ equity, and therefore
be able to gauge their ability to operate independently, and to know risk influence by
banks and other sources of capital in how they run their business.

Activity 3.1 Strategies to promote responsible ownership behaviour

In approximately 250 words, discuss possible strategies to promote responsible owner-

ship behaviour by family members in a family company.

16Feedback on activity 3.1

In your response, you should have considered the impact when second-generation family
members become owners – some may work in the business, while others may not.

In the next section, we shall discuss the responsibilities of shareholders to the company.

3.3 RESPONSIBILITIES OF SHAREHOLDERS TO THE

COMPANY
169 Reading: Page 51 of chapter 3 in the prescribed book

Family members who are shareholders should be committed and responsible. Sharehold-
170

ers in the company have the following responsibilities:

y to define and then demand reasonable returns on shareholder equity or invested assets;
y to provide the values and principles of doing business and ensure they remain instilled
in the company; and
y to define the owning family’s strategy and communicate owning-family priorities.
Activity 3.2: The primary responsibilities of shareholders towards the
corporation

Identify and critically discuss the primary responsibilities of shareholders towards the
corporation they own in not more than 500 words.

171

27 MNE3704/1
 Feedback on activity 3.2
17

In your response, you should have considered the following important aspects of the respon-
sibilities of shareholders to the company:

− Define and then demand reasonable returns on shareholder equity or invested capital.
− Provide the values and principles of doing business and ensure they remain instilled
in the company.
− Define the owning family’s strategy and communicate owning-family priorities.

Activity 3.3. Quiz

Answer the following multiple-choice questions:

(1) What are some strategies for promoting responsible ownership by family members
in a family business?

a. Provide family members with financial incentives to stay involved in the business.

b. Establish clear guidelines for family member participation in the business.

c. Encourage family members to develop their own career paths outside of the business.

d. All of the above.

Answer: d – all of the above

(2) What is a family council?

a. A group of non-family executives who oversee the management of a family business.

b. A formal governance structure that involves family members and non-family execu-
tives in making decisions and managing the business.

c. A legal arrangement that allows family members to transfer ownership and control of
the business to a trustee.

d. A sole proprietorship that is owned and operated by a single family member.

Answer: b – a formal governance structure that involves family members and non-
family executives in making decisions and managing the business

(3) What is a shareholder agreement?

a. A legal document that outlines the rights and responsibilities of shareholders in a

family business.

b. An informal understanding between family members about how to manage the
business.

c. A financial agreement that provides family members with a share of the profits.

d. A legal arrangement that allows family members to transfer ownership and control of
the business to a trustee.

Answer: a – a legal document that outlines the rights and responsibilities of share-
holders in a family business

28
 (4) What is a buy-sell agreement?
a. A legal document that outlines the process for buying and selling shares in a family
business.
b. An agreement between family members about how to split the profits of the business.
c. A financial agreement that provides family members with a share of the profits.
d. A legal arrangement that allows family members to transfer ownership and control of
the business to a trustee.
Answer: a – a legal document that outlines the process for buying and selling shares
in a family business
(5) What is a family constitution?
a. A legal document that outlines the rights and responsibilities of shareholders in a
family business.
b. An informal understanding between family members about how to manage the
business.
c. A formal governance structure that involves family members and non-family executives
in making decisions and managing the business.
d. A document that outlines the values, mission, and goals of the family and the business.
Answer: d – a document that outlines the values, mission, and goals of the family
and the business

172 Top of Form

173 The next logical step is to discuss effective governance of the shareholder-firm relationship.

3.4 EFFECTIVE GOVERNANCE OF THE SHAREHOLDER-FIRM

RELATIONSHIP
174 Reading: Page 54 of chapter 3 in the prescribed book

The interaction between ownership, family, and management is the source of what may
175

constitute a competitive advantage, but it is simultaneously the source of the biggest

challenge faced by family firms for the effective governance of the family shareholder-firm
relationship. Governance of the shareholder-firm relationship is essential. The tools for
governing that relationship are the board, shareholder meetings, and family meetings.

Activity 3.3 Importance of effective governance of shareholders

Discuss the importance of the effective governance of the shareholder-firm relationship

in ensuring the long-term success and sustainability of a family business.

176

29 MNE3704/1
 18 Feedback on activity 3.3

In your response, you should have considered the following important aspects:

y implementing a family business governance system

y family business cohesion
y effective governance
177 Next, we will turn our attention to the role of the board.

3.5 THE ROLE OF THE BOARD

178 Reading: Page 54 of chapter 3 in the prescribed book

Similar to how most corporations are governed, the board of directors serves as the
179

primary institution in family businesses. In the governance of the connection between

a family and its business, the board plays a significant role. Given the significance of the
board, family business next-generation leaders often conduct a critical analysis of each
restructuring initiative involving their board. They all converge on the notion that, because
of the family’s history on the board, far more communication and education are required
than is often considered necessary for board work and strategic planning procedures.

The owner-firm relationship is effectively governed by a number of institutions, including

180

the board. Most crucial exchanges of information regarding finances and strategy, as well
as education, are subject to regular meetings of the family council, the family, and the
shareholders. In fact, a family gathering or family council may serve as the catalyst for
the creation of a board of family and independent directors in many family firms. Family
meetings maintain shareholder participation and, in privately held companies, satisfy
the legal duty to recognise minority shareholders’ interests.

Activity 3.4 Attributes of the board of a family business

Click here to access the internet article, published by John L Ward on the topic, the role
of the board in family business strategy.

Critically analyse both sources and expound in approximately 250 words the important
attributes of the board of a family business.

19Feedback on activity 3.4

The realm of business is dynamic and unpredictable. Companies are constantly reacting to
evolving markets and competition. Family businesses face the added challenge of balancing
business and family issues in strategy. Business change inevitably creates stresses that impact
both management and ownership interests. In this setting, the board of directors has the special
role of assuring the strategic alignment of business and ownership interests.

30
 In your response, you should have considered the following important aspects:

y succession and ownership

y leveraging the board
y planning in the growth stages
y the mature family business
y new ventures, acquisitions, and divestitures
y the board as final arbiter
y the strategic roles of the board
Activity 3.5 The role of the board in managing family business

Critically discuss the role the board of directors plays in managing a family business, and
how they can balance the needs and interests of the family with those of the business.
Post your response in the Discussion Forum.

20Feedback on activity 3.5

Consider the following important aspects:

y Protect the interests of all shareholders, including family members and non-family
investors.
y Navigate the complex dynamics of family relationships and ensure that the family’s
interests do not undermine the success of the business.
y Establish clear policies and procedures for the governance and management of the busi-
ness, including succession planning, executive compensation, and conflict resolution.
y Provide guidance and support to the family members involved in the business, while
also holding them accountable for their performance and ensuring that they are acting
in the best interests of the business.
y Address any conflicts or issues that may arise, while also remaining committed to the
long-term success of the business and the well-being of the family.
y Now we turn our attention to the information flow and communication with and edu-
cation of shareholders.

3.6 INFORMATION, COMMUNICATION, AND EDUCATION:

SHAREHOLDERS
181 Reading: Page 55 of chapter 3 in the prescribed book

To successfully carry out their responsibilities, owners need to know what those respon-
182

sibilities are and how to exercise them. That is why the education of and continuing com-
munication with shareholders are essential to the healthy continuity of a family firm. The
ability to read and understand a financial statement with a high degree of comprehension
is a must for shareholders. Financial statements that aim to educate and inform, without
assuming the presence of an advanced degree in finance, are essential to family-firm
shareholders in carrying out their responsibilities as owners.

183

31 MNE3704/1
 Activity 3.6 The importance of communication in ensuring the continuity
of a family business

In approximately 250 words, discuss the role of education and continuing communication
with shareholders in ensuring the continuity of a family firm.

21 Feedback on activity 3.6

In your response, you should have considered the following essential requirements for share-
holders to know and understand:

y the capital structure of the firm

y debt levels in relation to owners’ equity
y appropriate measures of profitability
y cash flows in a particular industry
y measures of return on invested assets
y return on shareholders’ equity
y return on sales
y the growth trajectory of these over time
184 Let us now look how the owner structure should be designed and executed.

3.7 OWNERSHIP STRUCTURE: DESIGN AND EXECUTION

185 Reading: Page 57 of chapter 3 in the prescribed book (Poza & Daugherty 2018)

Policies governing ownership transfers that are driven by the desire to love and treat each
186

heir equally or by expectations of equality among family members are more likely to foster
a deadlock than foster ongoing agility and competition. The power to lead is earned, as
opposed to ownership, which is inherited. Transferring ownership without considering
corporate control makes it more challenging for successors to obtain the power to lead.
Understanding that there are various family company ownership models is the greatest
strategy to avert these issues. Despite hybrids, the majority of family businesses have one
of five ownership structures.

In an article, published on 20 September 2016 in the Harvard Business Review by the

187

authors Josh Baron and Rob Lachenauer, you will learn more about the five models of
family business ownership – this article will enhance your understanding of the owner-
ship structures of family-owned business.

Activity 3.7: Family business ownership model

Post your response in the Discussion Forum.

Click on the following link to access the article about the five models of family business
ownership: https://hbr.org/2016/09/the-5-models-of-family-business-ownership.

32
 Share with your fellow students which model of family business ownership you think the
most effective is and why?

y What are the advantages and disadvantages of each of these models?

y How do the size and complexity of a family business influence the choice of owner-
ship model?

y What are some of the challenges that can arise in a family business, and how can these
be addressed through the choice of ownership model?

y How important is it to involve non-family members in the governance and manage-

ment of a family business, and how can this be achieved?

Feedback on activity 3.7

22

Use the prescribed book as well as the article provided to you to answer these questions.

3.8 SUMMARY
188 In this study unit, we have focused on the priorities and responsibilities of the sharehold-
ers of a company and the effective governance of the shareholder-firm relationship. We
considered how to inform, communicate with, and educate shareholders. Options for the
design of the ownership structure and classes of stock were explained.

189 In the next learning unit, the governance and professional challenge experienced by
family-owned businesses are discussed.

ADDITIONAL REFERENCES
190 To enhance your understanding of the content discussed, visit the following websites as
they contain interesting information and examples:

191 https://hbr.org/2016/09/the-5-models-of-family-business-ownership

192 https://www.campdenfb.com/article/role-board-family-business-strategy

193

33 MNE3704/1
Learning unit 4
THE GOVERNANCE AND PROFESSIONALISATION
CHALLENGE

194 AIM OF LEARNING UNIT 4

195 The aim of learning unit 4 is to deepen your understanding of family business governance
and the associated risks posed by the inadequate governance of the family-business rela-
tionship. Family governance is a system of joint decision making by family and business
leaders that helps the owner family governs its relationship with its business and wealth.
It frequently receives support for this mission from a board of directors, a family council, a
family constitution that encapsulates the family’s vision and core values, a family employ-
ment policy that specifies the qualifications for family members to work for the company
or family office, an ownership structure that permits corporate control, and competent
non-family managers who set the bar for the family business’s professional management.

LEARNING OUTCOMES

y Explain what constitutes family business governance.

y Identify and critically discuss the governance challenges faced by family businesses.
y Analyse blurred system boundaries and their effects on family business.
y Distinguish between blurred system boundaries and joint optimisation of family
and businesses.
y Evaluate the role of the family council in family business governance.
y Suggest strategies for managing succession challenges in family business.

KEY TERMS

y Family governance
y Blurred system boundaries
y Family council
y Board of directors

196

34
197 SCHEMATIC OVERVIEW OF LEARNING UNIT 4
198 Below is a schematic overview of learning unit 4.

199

Figure 4.1: An overview of learning unit 4

4.1 INTRODUCTION
200 Reading: Page 60 of chapter 4 in the prescribed book

Family governance is an essential discipline for the long-term well-being of the family
201

business and the family’s wealth. It refers to a family’s ability to optimally discipline and
control the nature of the relationship between family members, shareholders, and profes-
sional managers in such a way that the business prospers, and the family promotes and
protects its unity and its financial, human, and social capital – as much for the family’s
sake as for the company’s (Poza 2018 – 4th ed).

202 Reflection activity

Reflect on your own family business or another family business of which you are aware.
203

When considering businesses, does a family business or a cooperate business have

more complexities regarding governance? In your opinion, which factors are associated
with its complexities?

You may have thought of family relationships within family businesses which increase
204

with multiple generations as one of the complexities. While family relationships can bring
love and passion for, and commitment to, the business, it can also drive nepotism, intense
rivalries and unhealthy power dynamics.

The governance of a family business comprises family governance as well as corporate

205

governance – as depicted in figure 4.2 below.

35 MNE3704/1
206

Figure 4.2: Governance of family business

Let us now take a better look at what the governance of a family business entails. There-
207

after, we will explore the challenges with regard to family governance.

4.2 WHAT IS FAMILY BUSINESS GOVERNANCE?

For a deeper understanding of the governance of family businesses, read the article titled
208

“Governance in family businesses: evidence and implications. IFB Research Foundation,

2019”, which is an open educational resource (available at: Creative Commons Attribution-
NonCommercial-NoDerivatives 4.0 – https://www.ifb.org.uk/media/4133/governance-
in-family-businesses-evidence-and-implications_web.pdf) by Howard and Kemp (2019).
This document was compiled by the IFB Research Foundation, a charity established to
foster greater knowledge and understanding of family firms and their contribution to the
economy and society, as well as the key challenges and opportunities that they face. The
Foundation’s vision is to be the United Kingdom’s centre of excellence for family business
research, and to this end its publications are designed to create a better understanding
of family business.

Activity 4.1 Understanding family governance

Read the introduction to the above article (on page 6). In your own words, write a short
paragraph (approximately 10 sentences) of your understanding of family governance.

23Feedback on activity 4.1

Mention the need for family governance and corporate governance.

36
 4.3 GOVERNANCE FOR FAMILY BUSINESSES
The governance of a family business is approached in varied ways. Howard and Kemp
209

(2019) highlight three fundamental considerations:

y the diversity of family business

y formal or informal governance
y governance structures

Read pages 12 to 15 of the article below to learn more about the family business gover-
210

nance structures:

https://www.ifb.org.uk/media/4133/governance-in-family-businesses-evidence-and-
211

implications_web.pdf.

Activity 4.2

Family businesses of any significant size depend on the quality and effectiveness of pro-
fessional family managers and non-family managers to ensure their continued success
and growth.

Briefly discuss how the three approaches as cited by Howard and Kemp (2019) can assist
in the governance of a family business given that each family business differs in size.

Feedback on activity 4.2

24

Your answer should cover the three fundamental considerations from the article on page 67
of the prescribed book.

4.4 PROFESSIONALISATION CHALLENGE AND FAMILY

GOVERNANCE
Read: The section titled Professionalisation challenge and family governance of chapter
212

4 in the prescribed book. Your attention is directed to the following topics for reading
with understanding:

y the strategy and structure of family governance

y the board of directors and the financial performance of the firm
y family members on the board
y the family constitution

These topics will help you better understand that the governance of the shareholder-firm
213

relationship is essential and that the tools for governing that relationship are the board,
shareholder meetings, and family meetings. Furthermore, they will highlight why the
role of the board is prominent in the governance of the relationship between a family

37 MNE3704/1
and its business when the owner-family-business interaction is preserved as a positive-
sum dynamic.

Family businesses of any significant size depend on the quality and effectiveness of profes-
214

sional family managers and non-family managers to ensure their continued success and
growth. Professionalisation requires professional managers (both family and non-family),
a modern organisation structure aligned with the firm’s strategy, information and control
systems, and policies and procedures that promote delegation and institutionalisation.

Activity 4.3

Refer to the following resources:

y Prescribed book: Poza and Daugherty (2018)

y Recommended article : https://www.ifb.org.uk/media/4133/governance-in-family-
businesses-evidence-and-implications_web.pdf (page 8 of the article)
Identify any two challenges for family-owned businesses and critically discuss the po-
tential of governance of good family business in resolving such an issue (one paragraph
to discuss each challenge – two paragraphs in total).
Read the posting of your fellow students and respond to two postings.
By reading the postings, you will learn about other challenges which you have not men-
tioned in your own discussion.

25Feedback on activity 4.3

Page 60 of the prescribed book will assist you with this discussion. Postings from fellow students
will further enhance your knowledge of this topic.

Now, let us turn towards blurred system boundaries in family businesses.

4.5 BLURRED SYSTEMS BOUNDARIES

215 Reading: Pages 64 to 65 of chapter 4 in the prescribed book (Poza & Daugherty, 2018)

In family businesses, boundaries amongst family, ownership, and management systems

216

may become blurred because of the complexity implicit in the system. Family businesses
are vulnerable to the consequences of blurred boundaries among the family, ownership,
and management systems.

Blurred family boundaries may become problematic if they start to influence decisions
217

related to family issues, ownership of the family business or the management thereof.
To manage the situation of blurred system boundaries, it must be understood that one
of the central premises of the family systems theory is that family systems organise
themselves to carry out the daily challenges and tasks of life, as well as adjusting to the
developmental needs of its members. Critical to this principle is the concept of holism.

38
 Activity 4.4

In approximately 200 words, share with your fellow students your understanding of a
blurred systems boundary and joint optimisation of family and businesses. In your view,
which one of these is more common in business businesses and why do you think this
is the case?

26 Feedback on activity 4.4

In your response, you should have considered the following important aspects:

y the consequences of blurred boundaries for the family, ownership, and management
subsystems
y nepotism as perhaps the most obvious of boundary infractions

The next section directs our attention to a particularly important governance factor in a
218

family business, namely the family council’s contribution to family governance.

4.6 THE FAMILY COUNCIL’S CONTRIBUTION TO FAMILY

GOVERNANCE
219 Reading: Pages 70 to 74 of chapter 4 in the prescribed book

A family council is a governance body that focuses on family matters. According to Moore
220

et al (2008:138), a family council is an “organised group of family members who gather

periodically to discuss family-related business issues”. Family councils can contribute to
family-controlled companies by

y helping families draw the line between family membership and board duty
y establishing a system of governance that both differentiates and integrates family
and business agendas

Poza and Daugherty (2018) discuss this in more detail and illustrate the relationship be-
221

tween boards and family councils (Poza & Daugherty 2018). They point out that these
two bodies should jointly optimise the family business system.

Activity 4.5 The role of governance in family businesses

This is an individual activity. After studying this section in the prescribed book, explain
the constituents of a family council. In a paragraph consisting of 150 words, critically
discuss the role of governance in family businesses.

39 MNE3704/1
 27 Feedback on activity 4.5

In your response, you should have considered the following:

y the value of family meetings

y a family council as a forum for family members
222 Finally, we will discuss managing the challenges of succession.

4.7 FAMILY GOVERNANCE: MANAGING THE CHALLENGES

OF SUCCESSION
223 Reading: Page 74 of chapter 4 in the prescribed book

While a board of directors may rely on many different sources of information when
224

exercising its due diligence in evaluating successor candidates from among siblings, it
should always be able to rely on its independent outsider members to review the facts
and render objective opinions and recommendations. For this reason, a board is in the
unique position of being able to enhance the perception of the quality and fairness of
the succession decision by shifting responsibility away from family members.

Activity 4.6 Strategies to manage challenges of succession in family

business

Critically discuss three strategies to manage challenges of succession in the family business.

28 Feedback on activity 4.6

Your discussion must include

− the role of the board of directors

− the importance of siblings’ teams
Activity 4.7

The purpose of this activity is to engage you in critical thinking, creativity and reflection.
Unlike other activities which expect you to answer questions, this activity requires you to
pose/formulate your own question based on the outcomes of this unit, which is family
business governance.

To get you started, you may refer to the article by Howard and Kemp (2019) to trigger
your thoughts on the governance of family businesses.

Howard, C & Kemp M. 2019. Governance in family businesses: evidence and implications.
IFB Research Foundation 2019. Available: Creative Commons Attribution-NonCommercial-
NoDerivatives 4.0

40
https://www.ifb.org.uk/media/4133/governance-in-family-businesses-evidence-and-
225

implications_web.pdf
Formulate two questions related to the governance of family businesses which you would
226

like to know more about and post it on this forum.

227 It is likely that other students will respond to the question you have posted.
You must also respond to at least two questions posed by other students. In your re-
228

sponse, you may refer fellow students to relevant sources/references by providing the
appropriate URL links.

4.8 SUMMARY
In this learning unit, we have discussed the common challenges to governing the fam-
229

ily business relationship; the institutions, or bodies best qualified to govern the owner
interaction in later generations; the family council; and succession. It was also noted that
family businesses are vulnerable to the consequences of blurred boundaries among the
family, ownership, and management subsystems. Family patterns or dynamics, replete with
emotional content, can easily override the logic of business management or ownership
rents. To govern the relationship between family members, managers, and shareholders,
some family enterprises write family constitutions. The family constitution stipulates some
of the policies and guidelines that shareholders must follow in their relations with each
other, other family members, and family-office/family-company managers.
In the next learning unit, we will evaluate the best practices for families in business whose
230

goal is to build continuity from generation to generation.

ADDITIONAL REFERENCES
To enhance your understanding of the content discussed in learning unit 4, visit the fol-
231

lowing websites as they contain interesting information and examples about the content
discussed:

y Family-owned businesses
232 https://www.inc.com/encyclopedia/family-owned-businesses.html

y Characteristics of family-owned businesses

233 https://www.gma-cpa.com/blog/characteristics-of-successful-family-owned-businesses

y What is a family-owned business and what is its importance?

https://www.referenceforbusiness.com/encyclopedia/Fa-For/Family-Owned-Businesses.
234

html

y What ensures a successful family business?

235 https://hospitalityinsights.ehl.edu/running-successful-family-business

y Why family businesses fail to implement succession planning

236 https://www.youtube.com/watch?v=sy12bsHSEwc

41 MNE3704/1
Learning unit 5
DIAGNOSING THE FAMILY BUSINESS AND
CREATING CONDITIONS FOR THE CONTINUED
SPIRIT OF ENTERPRISE

237 AIM OF LEARNING UNIT 5

The aim of learning unit is to evaluate the best practices for families in business whose
238

goal is to build continuity from generation to generation. It is also to find out what the
long-lasting family businesses − the centennial family companies − are doing to survive
and even thrive. The purpose of diagnosis in family business is to gain a deeper under-
standing of the family-business system’s functioning, which enables stakeholders to make
informed decisions, address challenges, and capitalise on opportunities for sustainable
growth and long-term success. The study unit endeavours to answer questions such as
the following:

y What can we learn from centennial family businesses?

y Name several diagnostic models and discuss the 12S model of family business diagnosis.
y What factors are responsible for the sustainability and adaptability enjoyed by these
firms across multiple generations?
y How do family businesses deal with cultural revolutions, entrepreneurial culture, family
unity and a customer-centric paradigm?

LEARNING OUTCOMES

y E xamine different roles that centennial family company leaders should consider
paramount in providing for long-term continuity.
y Suggest strategies that current generation leaders/CEOs need to implement in order
to promote continuity.
y Explore how next-generation leaders can best lead to achieve the success and con-
tinuity of the business.

KEY TERMS

For you to be able to navigate through this unit with minimal challenges, it is important
to know the following important key concepts and their meaning as they are used in
this learning unit.

y Ownership – the act, state, or right of possessing something.

y Family owners – family businesses can have owners who are not family members.
Family businesses may also be managed by individuals who are not members of
the family.
y Centennial family company – a 100-year-old company.

42
 y  iagnosis in family business – “diagnosis” within the context of family business
D
refers to the comprehensive assessment and analysis of the organisation’s internal
dynamics, structure, and processes to identify strengths, weaknesses, opportuni-
ties, and threats. It involves examining the family’s involvement in the business,
relationships among family members, governance practices, succession planning,
and overall business performance.

239 SCHEMATIC OVERVIEW OF LEARNING UNIT 5

240 Figure 5.1: A systematic overview of learning unit 5

241

5.1 INTRODUCTION
242 Reading: Chapter 5 in the prescribed book

There is growing evidence that family businesses continue to enjoy a longer life span
243

and that family-controlled enterprises tend to outperform management-controlled com-

panies in the long run. Global economic activity has accelerated to record speeds in
the past decade impacting on the resiliency and continuity among family-owned and
family-controlled corporations by interviewing fourth-, fifth-, and sixth-generation leaders
of companies that were at least 100 years old. In a world where entrepreneurship is becom-
ing more important and corporations seem unable to last, what are these longer-lasting
family businesses, these centennial family companies, doing to survive and even thrive?

Firstly, we discuss the issue related to the performance and sustainability of all family
244

enterprises.

5.2 OUTPERFORMANCE AND SUSTAINABILITY IN FAMILY

BUSINESSES
245 Reading: Page 95 of chapter 5 in the prescribed book

43 MNE3704/1
Shareholders and institutional investors who are not active in the running of the busi-
246

ness, with a very different perspective on management and the time cycles involved
in new strategies or new investments, can hamper these companies’ sustainability and
long-term performance.

Many family enterprises, strategically speaking, are behaving differently in both the
247

customer and financial/capital marketplace. For many, this different business model is
resulting in better financial performance. Others clearly are not outperformers and the
family effect on company results could be deemed negative. Great progress has, however,
been made in the past decade in expanding and reframing our understanding of family
enterprises and discovering their many unique features and their truly idiosyncratic stra-
tegic profiles. But much practice and a growing body of literature continue to be framed
by succession, wealth-management, estate-planning, and governance issues.

To enhance your understanding of sustainability in family business, you can refer to the
248

following open education resource book:

249 Tepe Küçükoğlu, M & Akca, M. 2021. Family businesses and sustainability,

https://www.researchgate.net/publication/349484515_Family_Businesses_and_Sustain-
250

ability.

251 Reading: Page 170 of chapter 3 – the family theories as a background to sustainability

252 The following theories are explored in this chapter:

y the family ecology theory

y the family development theory
y the family systems theory
y the family resource management theory

253 Refer to page 184 of section 3, on factors hindering the sustainability of family businesses.

254 Study page 187, section 3, on success factors for sustainability:

255 (PDF) Family Businesses and Sustainability (researchgate.net)

Activity 5.1 Sustainability models on family businesses

Critically analyse the sustainability models on family businesses in ensuring sustainability .

29Feedback on activity 5.1

In your response, you should have considered meeting long-term continuity without compro-
mising the ability of future generations to meet their own needs.

44
 Activity 5.2 Africa family business survey 2021

The following topic is a discussion forum activity on the Moodle platform. You are required
to critically analyse the Africa family business survey. Identify the voids and then using
an actual table, graph or chart, communicate the effects these voids may have. You are
required to download and study the Africa family business survey 2021 by opening the
following link:

30 Feedback on activity 5.2

In your response, you should have considered the following:

y growth in the time of Covid-19

y sustainability
y the translation of ambition into action
y family dynamics
y the formula for family business success
256 Next, we discuss enterprise sustainability: time to call for unity.

5.3 ENTERPRISE SUSTAINABILITY: TIME TO CALL FOR UNITY

257 Reading: Page 96 of chapter 5 in the prescribed book

Business sustainability is under attack across the board. Shortening product life cycles,
258

global hyper competition, drastically changed supply chains, volatile capital markets, and
rampant short-termism in the top managements of businesses everywhere are making
the goal of long-term sustainability or continuity a quickly vanishing dream. The Timken
Company is a specialty steel and bearing company based in Canton, Ohio. Timken remains
a global powerhouse in its industry, more than 110 years after its founding in 1899.

Activity 5.3 The different roles of centennial family company leaders

In approximately 250 words, examine the different roles that centennial family company
leaders should consider paramount in providing for long-term continuity. Also consider
why these roles are important .

31Feedback on activity 5.3

In your response, you should specifically have focussed on the issue of continuity, product
innovation and consistent values.

The next section provides an overview of the twelve elements of strategic fit: the 12S
259

model.

45 MNE3704/1
 5.4 THE TWELVE ELEMENTS OF STRATEGIC FIT: THE 12S
MODEL
260 Reading: Page 97 of chapter 5 in the prescribed book

The 12S family enterprise model suggests that it is not enough to think of family business
261

and family-business continuity as a matter of aligning family, ownership, and manage-

ment. It argues that wealth management, succession, family harmony, and governance
are also not enough if sustainability and continuity across generations of owners and
managers are the goals. Rather, we have to think and act simultaneously on many of the
12 factors influencing the strategic behaviour of a family enterprise, if indeed we are go-
ing to successfully influence its capacity to be sustainable from generation to generation.

Although the 12S model may appear overly complex for the first generation or entre-
262

preneurial family business, only two elements – shareholder structure, and shareholder
wealth management and information systems – represent what would be extraneous
considerations for young firms. First-generation entrepreneurial family businesses are
more often than not composed of a single operating entity with financial resources, and
the tracking of these, the responsibility of that entity’s controller, chief financial officer, or
founding owner. It is often only in later generations, as liquidity measures enable wealth
to be present in other ventures or asset classes, that wealth management and wealth
management information systems become relevant at all. In still later stages, many of
these are overseen by a family office reporting to the family’s council or a holding com-
pany’s board of directors.

Activity 5.4 Strategies that current generation leaders/CEOs must do to

promote continuity

In approximately 150 words, using your own words, state the strategies that current
generation leaders/CEOs need to do to promote continuity.

32Feedback on activity 5.4

In your response, you should have considered the following aspects:

y wealth management
y succession
y family harmony
y governance
Next, we turn our attention to continuing the spirit of enterprise: lessons from centennial
263

family companies.

46
 5.5 CONTINUING THE SPIRIT OF ENTERPRISE: LESSONS
FROM CENTENNIAL FAMILY COMPANIES
264 Reading: Page 103 of chapter 5 in the prescribed book

Global economic activity has accelerated to record speeds in the past decade. Similarly,
265

the speed at which fundamental changes have stormed through the global economy
– whether the catalyst was technology, the financial and capital markets, customers,
global competition, or a combination of these – is unparalleled in human history. This
means that more companies are requiring new products/services and growth opportuni-
ties, more often, to stay alive.

This brings us to the issue of centennial family companies and their role. Centennial
266

family company leaders say that continuity is about keeping the family enterprise com-
petitive and adaptable, and that the only disagreement worth having in a family busi-
ness is a disagreement about strategy. When the disagreements are about pay, perks,
and the presidency, the path of least resistance often leads to win-lose situations and
zero-sum dynamics. And families cannot support zero-sum dynamics because the losers
will eventually get their chance to harm the winners, even if it means the destruction of
the company and the family.

Keeping the business growing through a customer-centric paradigm and providing ca-
267

reer opportunities for family and non-family employees is at the heart of a positive-sum
dynamic and the capacity to have a virtuous cycle working for the firm and the owning
family.

Commitment by shareholders to govern their relationships for a higher purpose of contin-

268

ued ownership and control is necessary. Communication, information, and engagement

that promote family unity are as important to the success of these centennial companies
as managing strategically to remain competitive. The primary asset in creating competitive
advantage is embedded in the family through the invisible crossovers from the family’s
culture: the intangible assets, the patient capital, the thrift principle, a strong work ethic,
the commitment to excellent quality, the commitment to the long term, and the com-
mitment to financial independence. Family unity is the ultimate resource.

To gain a better understanding of this topic, you are directed to this link. This article will
269

give you insight in the challenges faced by the 21st century leaders at Kodak as well as
the key success performance areas used by such leaders.

Activity 5.5 How next-generation leaders can best lead to achieve success
and continuity

Explore how next-generation leaders can best lead to achieve success and continuity
for the business and in approximately 150 words, provide your own understanding of
the nature of the change efforts to promote continuity in the fourth-, fifth-, and sixth-
generation leaders.

47 MNE3704/1
 33 Feedback on activity 5.5

In your response, you should have considered the actions that leaders of successful centennial
family companies consider most critical to their ability to build great companies that last.

5.6 ROLE OF THE BOARD, FAMILY COUNCIL, SHAREHOLD-

ERS AND NON-FAMILY MANAGEMENT IN ENSURING
CONTINUITY
From Poza and Daugherty’s (2018:112-113) research, the following findings emerged as
270

being critical in ensuring continuity:

y The role of the board is prominent in the governance of the relationship between a
family and its business when the family-business interaction is preserved as a positive-
sum dynamic.
y The board composition has to change in order for the company to adapt and grow.
y Apart from restructuring the board, the CEO also has to re-engineer relationships with
shareholders (including the previous CEO) and employees.
y Financial information should be transparent to all shareholders and if necessary, fre-
quent informal conversations with shareholders should be held.
y The CEO and top management team should create a sense of urgency in the midst of
success in order to be receptive to change.
y Regular family council meetings are paramount during the early stages of the family
business, and family retreats can be added to thrash out succession and regeneration
processes. The transfer of power and ownership can begin at a family retreat.
y Next-generation family members and key non-family executives are given more
responsible leadership positions, allowing key non-family employees to compete for
top-level positions.
y Creating a holding company and a flat operating company allows more opportunity
for family and non-family members to achieve career advancement.

5.7 SUMMARY
Read the following cases to better understand the importance of leading a successful
271

family business.

The Ferré Media Group, part A (case 3) and part B (online case 1), highlight the unique re-
272

sources or core competencies that enterprising family members have been able to parlay
into competitive advantages across several generations. It is a centennial family company
and a great family business. It is a great case with which to tease out the lessons of cen-
tennial firms on resiliency and continuity.

The small family business cases in part I of Family Business may be more appropriate
273

to highlight the idiosyncrasies of family firms if a large number of your students come
from companies that have fewer than 100 employees and/or that generate less than $10
million in annual revenues.

48
274 In the next learning unit, we will discuss the transfer of power in a family business.

ADDITIONAL READING
275 (PDF) Family Businesses and Sustainability (researchgate.net)

276 Africa Family Business Survey 2023 (pwc.co.za)

277 Leadership In The 21st Century – Martin Roll

278

49 MNE3704/1
Learning unit 6
TRANSFER OF POWER

279 AIM OF LEARNING UNIT 6

The aim of learning unit is to analyse the impact of the succession process, the develop-
280

ment of effective successors, and the transfer of power. The CEOs of family businesses
have a mandate to drive the success of their businesses – that is, first and foremost, CEOs
have the responsibility of keeping the family company competitive and profitable. This
learning unit endeavours to answer questions such as the following:

y How can the CEO of a family business build an institution of governance, promote
shareholder loyalty and then pass the torch to a successor?
y What are the characteristics of the different CEO exit styles and how does each affect
the transfer of power?
y How can the CEO promote trust among family members while power is being
transferred?
y What are the unique roles of the CEO’s spouse?
y What are the characteristics of the different role types of the CEO spouse and how
does each impact on the transfer of power?
y What are the implications of CEO exit styles and CEO spouse roles for succession and
the transfer of power?

The answers to all these questions will enhance your understanding of the roles of the CEO
281

and the CEO’s spouse and their impact on the transfer of power in the family business.

LEARNING OUTCOMES

y Critically evaluate the important considerations in the appointment of a successor

to the CEO.
y Evaluate critically how family-business CEOs can be obstacles to the very succession
and continuity efforts they so prominently subscribe to.
y Critically discuss the six most common CEO exit styles and their implications for
succession.
y Distinguish between the CEO spouse role types and discuss the implications of each
role type for succession and continuity in the family firm.

50
 KEY TERMS

For you to be able to navigate through this unit with minimal challenges, it is important
to know the following important key concepts and their meaning as they are used in
this learning unit.

y Succession refers to the process of transitioning the management and the owner-
ship of a family business​.
y CEO succession – the process by which boards of directors ensure that their organisa-
tion can sustain excellence in CEO leadership.
y Systems theory perspective – this family systems theory looks at the connections
between family members, which is usually relatively limited to interactions between
individual members. When a family owns and runs a business, an open system view
of the family tends to predominate. It emphasises the interaction between the family
within the business.
y Stewardship perspective – at the leadership level, stewards view the family business
as an opportunity to create value and benefit for others (e.g., future generations of
the family; employees; the community) rather than solely an opportunity to build
one’s own personal wealth and power.

SCHEMATIC OVERVIEW OF LEARNING UNIT 6

282

283 Below is a schematic overview of learning unit 6.

284

Figure 6.1: A systematic overview of learning unit 6

6.1 INTRODUCTION
285 Reading: Chapter 7 in the prescribed book

Chief executive officers (CEOs) of family businesses do not only have a mandate to build
286

institutions of governance, but also to manage the transfer of power. They must ensure
the success of their businesses and institutionalise them for successive generations. The
CEO is not only an architect of governance, but also one of succession and continuity.
Whereas the CEO has a major influence on succession planning, recent studies have iden-

51 MNE3704/1
tified CEO spouses as being central to leadership succession and continuity processes in
family-controlled companies. Studies have indicated that a good succession plan leads
to fewer conflicts and better positioned companies. Read here to gain a better under-
standing of succession.

6.2 THE CEO AS ARCHITECT OF SUCCESSION AND

CONTINUITY
Reading: Page 138 of chapter 7 in the prescribed book
287

The CEOs of family businesses are building companies to last and are very similar to suc-
288

cessful chief CEOs, who must assume the role of architect, as they confront succession and
continuity. They care more about doing the right thing for the company and its continuity
than about promoting their own egos or agendas. For the CEO wanting to be an architect
of continuity, the “right people” must be in the top-management team and among the
governors of the shareholder group; they may be complemented by board members and
outside advisers. Chief executives preparing to transfer power cannot, single-handedly,
ensure succession. But they must, however, be the architects of the transition and know
when to step down – letting the engineers, contractors, and tradespeople (advisers, staff,
and next-generation members) take over.

Activity 6.1 The CEO as obstacle to succession and continuity

In approximately 100 words, critically evaluate how the family-business CEO can be an
obstacle to the very succession and continuity efforts he/she so prominently subscribes to.

34Feedback on activity 6.1

In your response, you should have considered the CEOs in family-controlled companies who
are prone to long tenures and even entrenchment.

6.3 THE CEO EXIT STYLE AND THE TRANSFER OF POWER

289 Reading: Page 139 of chapter 7 in the prescribed book

This section draws heavily on the research done by Jeffrey Sonnenfeld and PL Spence,
290

as reported in their classic 1989 article in Family Business Review. In fact, the first four de-
parture styles discussed in this section – monarch, general, ambassador, and governor
– are the products of their research. Observation and direct involvement in more than
100 succession and continuity processes over the past 30 years have led us to adapt Son-
nenfeld and Spence’s original typology and include two additional CEO exit types: the
inventor and the transition czar. To gain a better understanding of the styles, you must
read pages 139 to 143 and then complete the activity below.

52
 Activity 6.2 Six most common CEO exit styles

In approximately 250 words, critically discuss the six most common CEO exit styles and
what their implications are for succession.

Feedback on activity 6.2

35

In your response, you should have considered the following six CEO exit styles:

y the monarch
y the general
y the ambassador
y the governor
y the inventor
y the transition czar

6.4 THE UNIQUE ROLES OF THE CEO SPOUSE

291 Reading: Page 144 of chapter 7 in the prescribed book

The CEO spouse plays a unique role in the family business, including steward of the fam-
292

ily legacy, facilitator of communication, touchstone of emotional intelligence in family

relations, and co-architect of successful generational transitions. CEO spouses often play
a critical role as interim CEOs because of the unexpected death or illness of the CEO. This
is especially true for female CEO spouses, given their longer life expectancy. Interview
data from the sample of CEO spouses were analysed in the context of the original re-
search question: What unique contributions do CEO spouses make to the family-owned
business? Six leadership or role types emerged (read page 144 in the textbook to gain a
better understanding of this research).

Activity 6.3 CEO spouse role types

In approximately 250 words, distinguish between the CEO spouse role types and discuss
the implications of each role type for succession and continuity in the family firm.

36 Feedback on activity 6.3

In your response, you should have considered the following CEO spouse role types:

y business partner
y chief trust officer
y senior adviser/keeper of family values
y free agent
y jealous spouse
y “interim CEO” spouse
53 MNE3704/1
The following activity luminates the challenges associated with the transfer of power for
293

CEO spouses.

Activity 6.4 CEO spouse role types

If the CEO spouse role is so important, why does it remain largely invisible to people
outside the family – to scholars, board members, and advisers?

37Feedback on activity 6.4

Your answer should have included, amongst others:

− People other than the incumbent CEO also significantly influence leadership succession
and continuity in the family firm.
− The CEO spouse, in particular, is an important factor in both these processes.
− The media and more scholarly literature seldom address or acknowledge the roles and
perspectives of CEO spouses.
− Yet, some studies have identified CEO spouses as being central to the succession and
continuity processes in family-controlled companies.

Whether CEO spouses are in formal or informal positions, recognised or unrecognised

294

for their contributions, they often adopt a role in preserving and strengthening family
unity and the feasibility of family-business continuity.

CEO spouses, along with the CEOs, are coarchitects of family unity, family communica-
295

tion, and business practices.

The CEO spouses found ways to make contributions they felt were important – even when
296

standing on the margin of the business. Marginality must not result in invisibility, provided
the overall family-business agenda prefers love, legacy, and continuity over power.

6.5 SUMMARY
In this learning unit, a greater understanding of CEOs’ role in the appointment of a suc-
297

cessor is promoted as well as the important role the CEO’s spouse plays in this process. In
learning unit 7, we will look at the governance of the family business: boards of directors
and shareholder meetings.

RELEVANT READING
Case 1: The Binghams and the Louisville Courier-Journal Companies; and Case 5: The Vega
298

Food Company, are good examples of the resistance to plan transition and the painful
implications of such delays for family members and company employees.

54
Case 12: Fasteners for retail: A question of succession; and Case 3: The Ferré Media Group,
299

are, on the other hand, excellent examples of fulfilling the CEO leadership imperative in
family companies.

Case 5: The Vega Food Company, provides a great example of a former CEO spouse, now
300

widowed, who continues to perform the role of chief trust officer during the difficult
transition across generations.

Case 3: The Ferré Media Group also provides an eloquent story of a CEO spouse who was
301

a role-model of active participation in the business with her daughters while success-
fully performing the role as a chief trust officer during the generational transition. More
recently, her role type has migrated closer to that of a free agent.

302 Succession Planning: What the Research Says (hbr.org)

303

55 MNE3704/1
Learning unit 7
GOVERNANCE OF THE FAMILY BUSINESS: BOARDS
OF DIRECTORS AND SHAREHOLDER MEETINGS

304 AIM OF LEARNING UNIT 7

305 The aim of learning unit 7 is to elaborate critically on ways to establish and maintain
boards of directors, trustee and shareholder meetings, as well as establishing and main-
taining family councils, family assemblies, and family offices.

LEARNING OUTCOMES

y Analyse the effects of the board contribution within a family-owned business.

y Evaluate the selection criteria for board members.
y Analyse the importance of establishing a family council.
y Critically evaluate the reasons to create a family office.

KEY TERMS

For you to be able to navigate through this unit with minimal challenges, it is important
to know the following important key concepts and their meaning as they are used in
this learning unit.

y Family board – a family board of directors blends business and family governance.
y Family meeting – the purpose of a family meeting is to foster open communication
among family members.
y Family council – this is a forum where all the issues pertaining to the family and
business are discussed openly from the family perspective, agreed upon and con-
veyed to the board of directors.

306

56
307 SCHEMATIC OVERVIEW OF LEARNING UNIT 7
308 Below is a schematic overview of learning unit 7.

309

Figure 7.1: A systematic overview of learning unit 7

7.1 INTRODUCTION
310 Reading: Page 211 of chapter 9 in the prescribed book

Governance is a complicated subject when it comes to family businesses because of the

311

sometimes competing agendas of family, ownership, and business management. Gover-

nance refers to the ability to optimally discipline and control the nature of the relationship
between family members, shareholders, and managers in such a way that the enterprise
prospers, while the family promotes and protects its unity – as much for the family’s sake
as for the company’s, given that family unity represents a source of value that can be
translated into a competitive advantage.

Ownership structure and different classes of stock (e.g., voting and nonvoting) are es-
312

sential to effectively governing the corporation across generations of owners. Boards of

directors/advisory boards, family councils, family assemblies, shareholders’ meetings, and
top management teams provide the rest of the foundation for effectively governing the
interaction between ownership, management, and the family.

7.2 THE BOARD OF DIRECTORS

313 Reading: Page 211 of chapter 9 in the prescribed book

The board of directors is a legal entity, usually prescribed in the articles of incorporation.
314

This status gives the board unique rights and responsibilities, such as reviewing the
performance of the CEO and conceivably initiating his or her termination, although this
would be highly unusual in the world of family-owned companies. Many family-owned
businesses prefer to restrict membership on the board of directors to family members
and use an advisory board as a complement to the board of directors. Most boards of

57 MNE3704/1
directors emphasise their monitoring of management responsibility with their mission
guided by the implications of the agency theory.

315

Figure 7.2 An example of the board of directors

The primary responsibilities of a board of directors include reviewing the financial status
316

of the firm, deliberating on company strategy, looking out for shareholders’ interests, en-
suring the ethical management of the business, being a respectful critic of management,
reviewing the CEO’s performance and holding top management accountable, advising
the CEO on substantive subjects, monitoring and mediating to reduce conflict between
shareholders with divergent interests, bringing a fresh perspective to issues, and assisting
in the succession and continuity process. Independent directors perform a particularly
valuable function for family firms, where their dominant role on boards has been shown
to significantly improve the financial performance of the firm.

Activity 7.3 Reasons why the board of directors is necessary to a family-

owned business

Read the following article on the role of the board of directors:

In approximately 250 words, critically analyse the influence and effects of board contribu-
tions in a family-owned business.

− Motivate how the board of directors of a family-owned business can assist in planning.
− Explain how the loneliness that top managers can experience can be bridged.

38Feedback on activity 7.3

Have you considered the following in your discussion?

y assist in planning for the future

y provide help with objectives of the financial analysis
y outsiders can add perspective and problem solving
y bridging the loneliness experienced by top managers
58
 Activity 7.4 What are the contributions by a board to a family-owned
business?

In approximately 250 words, describe the role/contribution of a board to a family-owned

business regarding the strategy of the company?

39 Feedback on activity 7.4

In your response, you should place emphasise on the board’s advisory responsibility such as
the following:

y Review the financial status of the firm.

y Deliberate on the strategy of the company.
y Look out for the interests of the shareholders.
y Promote and protect the unity and long-term commitment of the owning family.
y Mitigate potential conflicts between shareholders, including majority and minority
shareholders.
y Ensure the ethical management of the business and the application of adequate
internal controls.

Read the case study on page 218 to gain a better understanding of the role of the board of
317

directors.

7.3 RECRUITMENT AND SELECTION

318 Reading: Page 217 of chapter 9 in the prescribed book

Many families, particularly multigenerational families with many members, write a policy
319

on family board membership. In this document, it is not unusual to see requirements for
family members on the board, including specific professional experience, term limits,
selection, and duties as family board members.

Unlike an advisory board, a board of directors is a legal entity with both advisory and
320

monitoring responsibilities. An advisory board, which consists of independent outsid-

ers, is sometimes used in lieu of having independent directors on the statutory board
of directors. This is a viable, although not preferred, alternative for smaller family firms.
The first recruit to a company’s board is critical – his or her reputation, competence and
willingness to serve on the board will play a significant role in the ability to attract other
highly qualified candidates.

Read this article to gain a better understanding of the criteria for selecting an indepen-
321

dent board of directors:

https://boardappointments.com/2022/10/28/what-are-the-selection-criteria-for-inde-
322

pendent-board-member/

59 MNE3704/1
 Activity 7.5 Criteria for board member selection

In approximately 100 words, evaluate the criteria for board member selection and evalu-
ate the role of effective board members – refer to page 220.

40 Feedback on activity 7.5

In your response, you should take into consideration the selection criteria for the independent
members of the board. This should include, inter alia, the general expectations.

Activity 7.6 The role of board member selection

In approximately 250 words, critically discuss the role of effective board members.

41Feedback on activity 7.6

In your response, you should have considered the expectations of board members as contribu-
tors to the leadership of the company – refer to page 222 of your prescribed book.

7.4 GOVERNANCE OF THE BUSINESS FAMILY: FAMILY MEET-

INGS, COUNCILS, AND FAMILY OFFICES
323 Reading: Chapter 10 in the prescribed book

A family council is a governance body that focuses on family and ownership matters,
324

frequently developing family-participation policies and dealing with liquidity issues and
estate planning. As the family moves to later generations, larger numbers of members,
and greater ability to govern itself, assisted by a family council, the family council often
becomes a supra-board where shareholders’ needs lead to strategic decision making by
the owning family.

A family assembly creates participation opportunities for all members of larger multigen-
325

erational families at least once a year. Family meetings and family councils are a reliable
forum for the education of family members about the business. In family meetings, family
members learn about the rights and responsibilities that accompany being an owner-
manager as well as about the important distinctions between ownership, management,
and family membership. They also provide a forum to minimise the potential for conflict
within the family.

The real challenge is to create an optimal balance of ownership, family, and management
326

that fosters positive family-business interaction through family communication and fam-
ily governance. Organised family meetings, away from the workplace and kitchen table,
constitute the best forum for achieving and maintaining this optimal balance.

60
 Activity 7.6 Tasks to be performed during a family meeting

In approximately 200 words, analyse and elaborate on the tasks that should be performed
during a family meeting.

42Feedback on activity 7.6

In your response, you should have considered the following:

y Update family members not active in the business about the state of the business:
financial results, management, strategy, and the competitive dynamics of the industry.
y Provide an opportunity for good communication.
y Educate family members about the difference between ownership, management of
the business, and family membership.
y Engage family members in responsible ownership.

7.5 THE FAMILY COUNCIL

327 Reading: Pages 234 to 235 of chapter 10 in the prescribed book

A family council is a governance body that focuses on family matters, frequently de-
328

veloping family-participation policies. Strategic decision making, while less frequent, is

also a function of a family council, usually in later generations. In these cases, the family
council acts as a family supra-board, where owner goals influence the decision making
of business boards and top-management teams.

Furthermore, research on family business continuity suggests it is necessary to have a

329

strong family governance structure to support the business. The family must learn to
be good owners and shareholders as well as, or even instead of, being good managers.
Family members must be accountable to their businesses and take on the responsibility
of securing the future of the business or, in some cases, selling the business.

Open and safe processes for sharing information among family members in family
330

meetings are prerequisites for effective planning, policy making, and decision making
by family groups.

Read this article as it provides interesting facts about what constitutes a family council.
331

Activity 7.7 Establish a family council

In approximately 250 words, critically explain when a family should establish a family
council.

61 MNE3704/1
 43Feedback on activity 7.7

In your response, you should have considered that the family must learn to be good owners
and shareholders as well as, or even instead of, being good managers. Family members must
be accountable to their businesses and take on the responsibility of securing the future of the
business or, in some cases, selling the business.

A family often grows to the point that it is too large to have productive working meetings with
all family members present. More often, the idea of holding formal family meetings does not
occur until the family has grown significantly in size and family members recognise that the
size of the family prevents effective meetings. This large family group might then choose to
be represented by a family council. The family council is a governance body that focuses on
family and ownership matters and is to the family what the board of directors is to the busi-
ness. The family council meets on a regular basis and discusses issues relevant to the family
as business owners.

Activity 7.8 Creating a family office

In approximately 250 words, give a brief account on why a family creates a family office.

44 Feedback on activity 7.8

In your response, you should have considered that the main purpose of a family office is to as-
sist shareholders with the responsibilities born out of their ownership relative to the company
– and in the process, they often help make the owner-company relationship a more positive
and disciplined one.

A family office supports a business model for the enterprising family that puts the family at
the heart of the family-business strategy and family-wealth decision making. This means
that transgenerational strategies that include entrepreneurship, philanthropy, investments
in real estate, private equity and other alternative investment classes can all be part of the
family’s enterprise from generation to generation – read pages 237 and 238 to gain a better
understanding.

7.6 SUMMARY
It is important that family members be informed of the unique responsibilities and chal-
332

lenges of employment in family business. They should be advised that in most cases they
will be held to a higher standard of conduct and performance than other employees. We
support an internship program to introduce future generations to the company.

In the last learning unit, we will focus on the uniqueness of the strategic planning process
333

in the family business, estate planning and the owner’s plan.

62
 ADDITIONAL READING
https://work.chron.com/simple-job-descriptions-board-officers-12744.html.
334

https://boardappointments.com/2022/10/28/what-are-the-selection-criteria-for-inde-
335

pendent-board-member/.
https://familybusinesspartnership.com/what-is-a-family-council/.
336

RELEVANT CASE RESOURCES

The Kropps Company’s family constitution represents a sophisticated blueprint for the
337

operation of all these governing bodies.

338 Consider the following questions while reading this case resource:

(1) What does this family constitution state is the desired relationship between the
Kropps Family and the Kropps Companies management?
(2) What benefits might non-family management derive from this family constitution?
(3) What are some of the implications of this family constitution for family shareholders
of Kropps Companies?
(4) What bodies or institutions does this family constitution rely on for effectively gov-
erning the relationship between owner-managers, family shareholders not active
in management, and non-family managers at Kropps?
339

63 MNE3704/1
Learning unit 8
STRATEGIC PLANNING AND
TRANSGENERATIONAL ENTREPRENEURSHIP

340 AIM OF LEARNING UNIT 8

The aim of this study unit is to explore the nature of strategic planning in family-controlled
341

corporations. The study unit endeavours to answer questions such as the following:

y What did Michael Porter formulate about competitive advantages, and would these
apply to family firms?
y How does the zero-sum family dynamic affect strategic planning?
y How can you use unique business models to create value for your family-controlled
firm?
y Why is a process of parallel strategic planning necessary in a family business and what
does this process entail?
y Why should the family business be concerned with customer orientation?
y Is strategic planning a part of disciplined execution?
y What do the statistics reveal about business development and the survival of family-
controlled firms?
y What competencies create value for customers and family-controlled companies?

342 The answers to all these questions will deepen your appreciation of the value of strategic
planning for the family-controlled business. Firstly, Poza and Daugherty (2018) discuss stra-
tegic planning as defined by Porter and then address zero-sum family dynamics, customer-
orientation, disciplined execution and the unique vision of family-controlled companies.

343 SCHEMATIC OVERVIEW OF LEARNING UNIT 8

344 The primary objective of strategic planning in any company is to create value for its cus-
tomers. Only in this way can it create value for itself.

345 Time lags can be significant, especially when an ownership-first orientation replaces a
customer-first orientation.

64
346

Figure 8.1: A systematic overview of learning unit 8

LEARNING OUTCOMES

y  valuate a leadership strategy to ensure continuity of the family-management-

E
ownership system in a changing environment.
y Briefly explain how the family business can continue to be agile and competitive in
the face of change.
y Critically evaluate strategies to enhance family businesses through the integration
of technology.

KEY TERMS

You must understand the following key concepts in order to attain the learning outcomes
for the topic:

Strategic planning is a high-leverage organisational strategy used in small and large com-
panies, across nearly all professional sectors. All members of an organisation can benefit
from learning about it in more detail. Understanding the key aspects of the process and
effective implementation strategies is especially critical.
Zero-sum family dynamics – family dynamics are complicated, and zero-sum mindsets
within them are hazardous. They destroy the potential.
Value creation is the process of developing value for the customer or stakeholder by
using resources, capital, and relationships.
Business models refer to a company’s plan for making a profit. It identifies the products
or services the business plans to sell, its identified target market, and any anticipated
expenses.
Customer-oriented company is a business approach that prioritises the needs of the
customer over the needs of the business. Customer-oriented companies invest in solving
buyers’ needs and providing quality customer service.
Strategic regeneration is necessarily targeted at the specific characteristics of the
social-ecological systems with which business organisations interact as it places human
activity within ecological limits and accepts the health of the social ecological system.
Business development includes the ideas, initiatives, and activities that help make a
business better. This comprises increasing revenues, growth in terms of business expan-

65 MNE3704/1
 sion, increasing profitability by building strategic partnerships, and making strategic
business decisions.
Study pages 245 to 266 in Poza and Daugherty (2018).

8.1 INTRODUCTION
347 Reading: Chapter 11 in the prescribed book (Poza & Daugherty 2018)

The primary objective of strategic planning in any company is to create value for its cus-
348

tomers. Only in this way can it create value for itself. Time lags can be significant, especially
when an ownership-first orientation replaces a customer-first orientation.

The zero-sum dynamic is a precursor to business failure and disharmony among family-
349

business members. In the absence of growth, family businesses become very vulnerable
during the succession process. A steep decline at the end of a successful product line
run or the end of a generation’s leadership can be the result of the small size of a family
business, its propensity for zero-sum family dynamics, limited access to financial assets,
and/or the paralysis of business operations.

Strategic planning, therefore, increases owners’ and managers’ awareness of changes

350

in the competitive environment and promotes much-needed communication among

shareholders. With its natural bias toward growth, strategic planning is a great antidote
to the challenges of the late maturity and decline stages.

8.2 STRATEGIC PLANNING 101 AND THE FAMILY BUSINESS

351 Reading: Pages 249 to 250 of chapter 11 in the prescribed book (Poza & Daugherty 2018)

Various approaches to strategic planning, Porter’s five forces model, SWOT analysis, the
352

implementation planning method, and more recent advancements in strategic planning

are all described in this section by Poza and Daugherty (2018:249-250).

These approaches emphasise that in a family business, strategic planning must be imagi-
353

native and require communication at three levels (between family members, between
family and management, and between management and the board), ample financial
and market information, building on various perspectives and foreseeably divergent
viewpoints across generations to reconcile the wisdom of the past with the focus for
the future. Below, watch the video by Michael Porter as he explains the five competitive
forces that shape strategy:

https://www.bing.com/videos/search?q=strategic+regeneration%3a+transgenerational
354

+entrepreneurial+values&&view=detail&mid=AA8409C327FB547B2D31AA8409C327FB
547B2D31&&FORM=VRDGAR&ru=%2Fvideos%2Fsearch%3Fq%3Dstrategic%2Bregener
ation%253a%2Btransgenerational%2Bentrepreneurial%2Bvalues%26FORM%3DHDRSC6

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 Activity 8.1 The uniqueness of the strategic planning process

In approximately 250 words, critically describe the uniqueness of the strategic planning
process in the family business.

45Feedback on activity 8.1

In your response, you should have considered the following important aspects:

y Competencies that create value for customers and firms include rapid speed to market,
flexibility in response to customers and competitors, a strategic focus on proprietary
products and specialty niches, a concentrated ownership structure, reduced agency
costs, high quality of product and/or service, and capacity for customisation.
y Porter’s work suggested that competitive intensity is a function of five forces which
need intensive reading.

8.3 ZERO-SUM FAMILY DYNAMIC AND STRATEGIC

PLANNING
355 Reading: Page 251 of chapter 11 in the prescribed book (Poza & Daugherty 2018)

Strategic planning promotes communication and can counteract secrecy and “me-ism”
356

which are commonly found in family businesses. When no growth occurs in a family
business, a zero-sum dynamic exists.

A steep decline at the end of a successful product line run or the end of a generation’s
357

leadership can be the result of the small size of a family business, its propensity for zero-
sum family dynamics, limited access to financial assets, and/or the paralysis of business
operations.

Poza and Daugherty (2018:251–252) explain this vicious cycle of the absence of growth
358

in detail and illustrate it with the example of the McIlhenny Company.

Activity 8.2

Read this article about the McIlhenny Company and critically analyse the case situation
by describing how the absence of growth affected the company.

46 Feedback on activity 8.2

In your response, you should have considered the following important aspects:

y Most organisations, whether family controlled or not, engage in some resistance to

change.

67 MNE3704/1
 y From a strategic perspective, family-owned enterprises are most susceptible to acceler-
ated decline and failure because of their heavy reliance on an individual entrepreneur
or a next-generation CEO.
y Founders often display a natural disdain for organisational architecture, such as es-
tablishing systems, professional managerial practices, and governance mechanisms.
y Next-generation leaders may also exhibit this disdain for managerial discipline as they
engage in the strategic regeneration and growth of the business.
y After all, professional managerial practices have bureaucratic roots, and the desire
to flee from the bureaucracy of a publicly owned global behemoth is frequently the
reason for an entrepreneur starting his or her own company.

8.4 CREATING VALUE WITH UNIQUE BUSINESS MODELS

Family businesses can combine any of seven sources of value in various ways to design
359

unique business models in order to enhance their competitive advantage. These sources
are explained in detail in Poza and Daugherty (2018:252–257):

360 1. financial resources

361 2. physical assets

362 3. the product: its price and performance

363 4. organisational capabilities

364 5. customer-supplier integration

365 6. brand equity

366 7. the nature of the family-business relationship.

Read the following article on Pick n Pay’s business model to gain a better understanding
367

of this section:

https://picknpayinvestor.co.za/downloads/2022/business-model/our-business-model-2022.
368

pdf

Activity 8.3

In approximately 250 words, explain how the primary sources can create value for a fam-
ily business as compared to a non-family business. In your answer, reflect on the Pick n
Pay business model.

47 Feedback on activity 8.3

Your answer needs to include amongst others:

y financial resources, such as cash and securities

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 y physical assets, such as plants and equipment
y the product (sometimes protected by patents) and its price and performance
y brand equity, which is the market’s perception of a distinction in quality or reputation,
a perception created over time
y organisational capabilities, which are the competencies residing in employees and
unique organisational architectures
y customer-supplier integration (once called distribution and logistics), which includes
new ways of getting the product or service to the customer in any form, at any time,
and in any place
y a positive family-business relationship, the source of patient family capital

8.5 THE LIFE CYCLE OF THE FIRM, THE FAMILY, AND THE
NEED FOR PARALLEL STRATEGIC PLANNING
369 Reading: Pages 257 to 260 of chapter 11 in the prescribed book (Poza & Daugherty 2018).

Strategic planning in a family firm relies on a parallel process. In other words, it requires
370

both the shareholders (family owners) and the management (often a team of owner-
managers and non-family managers) to think about, plan and execute strategy in tandem.
It is to the benefit of the family business, and not just to the family, to acknowledge the
wishes of the owners in its strategic planning activity and to expect in return enough
shareholder commitment for family capital to behave patiently, allowing for tax-efficient
transfers of this capital and a long-term perspective on the strategy of the business.

8.5.1 Stages of business development

Beyond the start-up phase and the subsequent growth phase lies organisational maturity.
371

During the mature stage, the business represents a complex set of stakeholders: the banks
that have financed the growth, the family members who have worked in the business since
high school or college, key non-family managers who have contributed substantially to
the business’s success, other family members with financial and/or emotional interests in
the business, other investors, lower-level employees, and the government. Each of these
stakeholders has a different perspective on the business and, for different reasons, feels
entitled to certain benefits or returns (Poza & Daugherty 2018:257).

Leaders of family-controlled enterprises, overwhelmed by the complexity of the stake-

372

holder base, may lose the vision that was so much a part of the young organisation. This
absence of vision often sets the stage for decline. Because of the life cycle of the business,
what the business needs in order to remain competitive (reinvestment) may very well not
be what the shareholders (ownership life cycle) had in mind when several of them com-
mitted to a significant investment outside the firm in a family real estate partnership
(regeneration). Poza and Daugherty (2018:258) illustrate in figure 11.3 in their book the
stages of business development; and in figure 11.4 the life cycle stages that influence the
family business strategy.

The result of this effort is the identification of a group of strategic initiatives that call for
373

organisational, financial, and human resources.

69 MNE3704/1
1. The concurrent strategic planning process’s dual-path trajectory then interacts. The
374

family business’s business model is revised during a board of directors’ strategic plan-
ning meeting where both family shareholder interests and simple business objectives
are reflected.

2. The CEO, family company executives, and board members are the champions of the
375

shifting interests, preferences, and objectives of the customers in this concurrent strategic
planning process. They enable shareholders to have faith in the potential of long-term
shareholder value development by vigorously promoting those interests.

Activity 8.4

In approximately 250 words, discuss how organisational innovation and digital strategies
can give the firm competitive advantages.

Feedback on activity 8.4

48

Your response should have considered the following:

Organisational innovation and digital strategies can give the firm competitive advantages by
making the company faster, better, or closer in its relationship with the customer. Price, qual-
ity, and on-time performance create value for the customer. Organisational innovations and
digital strategies can be a source of competitive advantage. They often help a firm reduce its
costs; establish more frequent and speedier integration between suppliers, the firm, and its
customers; and improve the quality of the product-service combination.

8.6 STRATEGIC REGENERATION: TRANSGENERATIONAL

376 ENTREPRENEURIAL VALUES

377 Reading: Page 261 of chapter 11 in the prescribed book (Poza & Daugherty 2018)

This section begins with an explanation of how corporate sustainability is under attack
378

by Poza and Daugherty (2018:261-268). According to research, the average lifespan of

American businesses – both family-owned and non-family – is ten years. In a time of in-
tense competition, family businesses can benefit from their special assets – patient family
capital – to gain competitive advantages. Interpreneurship is one way to accomplish this.
They discuss the five steps to interpreneurship (Poza & Daugherty 2018:262–263)

379 1. Develop the vision, the dream, individually in family meetings, in the family council
and board.

380 2. Assign a next-generation member the responsibility for being the company’s strategic-
planning quarterback if the skills are there.

381 3. Write the business plan.

70
382 4. Once the business plan is approved and the new venture funded, make the next gen-
eration member general manager or president of the new venture.

383 5. Start a family bank or family venture capital company.

384 The following issues are also addressed in this section (Poza & Daugherty 2018:263-264):

y the new venture business plan

y the new venture review board

Activity 8.5

In approximately 250 words, briefly explain the concept of interpreneurship, and the
resource it represents to the family-owned or family-controlled company. Explore how
growth can result from interpreneurship, and how competitive advantages help the
next-generation leader create a platform for positive-sum dynamics in the family and
therefore enhance the prospects of continuity.

49Feedback on activity 8.5

Have you considered the following important aspects?

Interpreneurship means intergenerational entrepreneurial ventures driven by new products,

product line extensions, new markets for existing products, going global via internet sales,
exports, and joint ventures. An enterprising family sponsors the retention of much of the en-
trepreneurial culture in the company by engaging in this continuing entrepreneurial activity.

Business plans of next-generation members are reviewed by a venture review committee

and approved by the family holding company board, even if the venture is outside the core
business of the firm.

This enables next-generation members to have the enterprising family act as an angel inves-
tor or family bank on ventures that next-generation members are passionate about. In doing
so, these leading families are signalling that what they need from the next generation is not
volunteers to “just mind the store” but rather corporate entrepreneurs (who will adapt the core
business to changes in the competitive environment) or new venture entrepreneurs who will
exploit new opportunities available to them.

8.7 UNIQUE VISION OF FAMILY-CONTROLLED COMPANIES

A distinctive vision and business strategy are required to revitalise and expand a family
385

firm in the interest of continuity (Poza & Daugherty 2018:264). Family-controlled compa-
nies have turned the following competencies into value creators for their customers and,
thus, into competitive advantages for their firms:

y Rapid speed to market.

y Flexibility and nimbleness in response to customers and competitors.

71 MNE3704/1
y Strategic focus on proprietary products and speciality niches that afford more pro-
tected profits.
y A concentrated ownership structure that provides more patient capital and com-
mitment on the long term, enabling the company to build brand equity, promote
customer loyalty, and sponsor continued reinvestment in family unity and unique
organisational capabilities.
y Lower total costs derived from reduced agency costs – for example, in administration,
supervision, and financial controls.
y High quality of product and/or service that builds brand equity, reputation, and higher
profitability.
y Capacity for customisation.

8.8 DISCUSSION FORUM ACTIVITY

Go to the Discussion Forum and discuss the following with your fellow students: How
can growth resulting from interpreneurship and competitive advantage help the next-
generation leader create a platform for positive-sum dynamics in the family and therefore
enhance the prospects of continuity?

50Feedback on Discussion Forum activity

Your discussion can include issues such as the following:

Several family companies go a step further and fund the business plans of next-generation
members whose business plans are reviewed by a venture review committee and approved by
the family holding company board, even if the venture is outside the core business of the firm.

This enables next-generation members to have the enterprising family act as an angel inves-
tor or family bank on ventures that next-generation members are passionate about. In doing
so, these leading families are signalling that what they need from the next generation is not
volunteers to “just mind the store” but rather corporate entrepreneurs (who will adapt the core
business to changes in the competitive environment) or new venture entrepreneurs who will
exploit new opportunities available to them.

8.9 SUMMARY
Read the summary on page 265 (Poza & Daugherty 2018). In this study unit, we explained
386

the importance of strategic planning for family business continuity, and what zero-sum dy-
namics entail. We looked at the sources and competencies that create value for customers.

ADDITIONAL REFERENCES
To enhance your understanding of the content discussed in this lesson, visit the follow-
387

ing websites as they contain interesting information and examples about the content
discussed.

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y http://www.metnews.com/articles/2004/reminiscing102104.htm
y https://picknpayinvestor.co.za/downloads/2022/business-model/our-business-mod-
el-2022.pdf
y https://www.bing.com/videos/search?q=strategic+regeneration%3a+transgenerati
onal+entrepreneurial+values&&view=detail&mid=AA8409C327FB547B2D31AA8409
C327FB547B2D31&&FORM=VRDGAR&ru=%2Fvideos%2Fsearch%3Fq%3Dstrategic%
2Bregeneration%253a%2Btransgenerational%2Bentrepreneurial%2Bvalues%26FOR
M%3DHDRSC6.
y The Ferré Media Group part A (case 3) and part B on pages 79 to 81 (Poza & Daugherty
2018).

73 MNE3704/1
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