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Family Business: What Makes It Unique?

The document discusses key aspects of family businesses. It defines a family business as having ownership control by family members, strategic influence of family in management, and concern for family relationships. It notes that family businesses are unique due to the presence of the family, the owner's dream to keep the business in the family across generations, and the overlap of family, ownership, and management. Several theories are also discussed, including systems theory and how boundaries between family, ownership, and management can become blurred.

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121923601018
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© © All Rights Reserved
87 views

Family Business: What Makes It Unique?

The document discusses key aspects of family businesses. It defines a family business as having ownership control by family members, strategic influence of family in management, and concern for family relationships. It notes that family businesses are unique due to the presence of the family, the owner's dream to keep the business in the family across generations, and the overlap of family, ownership, and management. Several theories are also discussed, including systems theory and how boundaries between family, ownership, and management can become blurred.

Uploaded by

121923601018
Copyright
© © All Rights Reserved
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Family Business

What Makes It
Unique?
Family Business: Working
Definition
 A family business is a synthesis of:
 Ownership control by members of a family or
consortium of families
 Strategic influence of a family in the management
of the firm
 Concern for family relationships
 The dream (possibility) of continuity across
generations

1-2
What Makes the
Difference
 Presence of the family
 Owner’s dream to keep the business in the
family
 Overlap of family, ownership, and
management
 Competitive advantage derived from
interaction of family, management, and
ownership

1-3
Relevant Theories

1-4
Systems Theory

 Model shows overlapping subsystems of


family, management, and ownership
 Firm is dynamic system in which integration
achieved by adjustments to subsystems
 Individual perspectives of family and firm may
differ, leading to overemphasis on one sub-
system at expense of others

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Systems Theory Model

Ownership

Family Management

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Blurred Boundaries

 Boundaries among family, ownership,


management systems may become blurred
 Problems determining if decisions relate to family,
ownership, or management issues
 Family rules used in the business
 Problem-solving ability diminished by blurred
boundaries
 Businesses may become family-first,
ownership-first, or management-first

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Family-First Businesses

 Employment in business is membership right


 Members of same generation paid equally
 Extensive family perks from business
 Secrecy often paramount and family
members protect each other
 Business becomes part of lifestyle
 Commitment to continuity depends on
agendas of individual family members

1-8
Business-First Firms

 Employment on the basis of qualifications—


family discouraged from working in business
 Performance of employed family members
reviewed as for nonfamily
 Compensation based on responsibility and
performance
 Conversation between family members is all
business

1-9
Business-First Firms,
continued
 Business growth, market share, profitability,
return on assets, return on equity constitute
the scorecard
 Next generation viewed in terms of how they
can manage and grow business
 Family events often cancelled/delayed for
business reasons
 No automatic commitment to family business
continuity
1-10
Joint Optimization
Alternative
 Family employment policy guides employ-
ment of family
 Some family members are employees; others
responsible shareholders
 Performance of employed family members
reviewed as nonfamily

1-11
Joint Optimization,
continued
 Family members encouraged to work outside
business to get experience
 When family members meet, conversation is
both family and business oriented
 Commitment to family business continuity

1-12
Agency Cost Theory

 Traditional theory: Alignment of owners and


managers decreases need for agency costs
 Recent research: altruism of owner-
managers leads to increased agency costs
 Agency costs can be controlled by
managerial and governance practices
 Board of directors important in monitoring
managerial behavior and controlling costs

1-13
Challenges to Continuity

 Shortening product life cycles


 High transfer tax penalties
 High market valuations of ongoing businesses
by historical standards
 Family businesses considered outdated
 Family structure far from stable
 Next generation family business leaders
unable/unwilling to accommodate
 CEOs living longer—obstacles to succession
1-14
Resource-Based Theory

 Resource-based theory highlights unique


capabilities or resources that family firms
convert into competitive advantage
 These resources referred to as organizational
competencies

1-15
Competitive Advantages of
Family Business
 Speed to market
 Strategic focus on market niches
 Concentrated ownership structure
 Lower overall costs
 Quality of product/service
 Agility and flexibility
 Owner-manager and long-term view

1-16
Concentrated Ownership

 Ownership structure impacts corporate


productivity
 Stock concentration positively correlated to
 Related diversification
 R & D expenses per employee
 Training per employee
 Overall corporate productivity

1-17
Lower Overall Costs

 Cost of capital is nearly 0% when owner


controls stock
 Financing for other businesses:
 25–30% for venture capital
 17–20% for mezzanine financing
 Prime rate for bank financing
 Administrative and control costs also reduced
absent need for principal supervision

1-18
Agility and Flexibility

 Flexibility of new manufacturing and


distribution technology makes smaller runs
economically attractive
 Customization, changing consumer
preferences, shorter product life cycles
reward agility
 EDI/Internet-based partnerships make agility
possible across value chain

1-19
Owner-Manager

 Focused on customers, family, employees,


profitability, lifestyle
 Experiences conflicts between family,
management, and ownership and optimizes
links
 Average tenure of 18 years vs. 3 years for
public company CEOs

1-20
https://www.forbes.com/sites/nusbusinessschool/2018/05/25/4-types-of-
family-businesses-youll-see-in-asia-and-how-to-govern-each-
effectively/#3b41d264659f

1-21
Issues in Family Business

 Family versus Non-family Employees


 Employment Qualifications
 Salaries and Compensation
 Succession

https://economictimes.indiatimes.com/news/company/corporate-
trends/lessons-from-mindtree-jet-airways-do-unto-employees-as-
you-would-have-them-do-unto-you/articleshow/68571352.cms?
from=mdr

1-22

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