The Uniqueness Of The Family Business

Published Date: 02 Nov 2017

Introduction

The reason why a person establishes a business is to satisfy the necessities of his or her family. But, when that business passes from generation to generation it is called a family business. Family business is administrated and/or managed on a supportable, possibly cross-generational foundation to profile and possibly follow the formal or hidden image of the business held by people who belong to one, or a small number of families. European Commission defines family business as the case where "The majority of decision-making rights is in the possession of the natural person(s) who established the firm, or in the possession of the natural person(s) who has/have acquired the share capital of the firm, or in the possession of their spouses, parents, child or children’s direct heirs; The majority of decision-making rights are indirect or direct; At least one representative of the family or kin is formally involved in the governance of the firm; Listed companies meet the definition of family enterprise if the person who established or acquired the firm (share capital) or their families or descendants possess 25 per cent of the decision-making rights mandated by their share capital." (European Commission Experts).Even though the business organization is essential to the sustainability of the family business, the family is likewise significant to the family business. The family accumulates and produces the strengths empowering the evolving and constant tactical behaviour.

The appearance the family business is basically a historical event and a natural and rational occurrence. Family businesses have ancient bonds with farmers, crafters, local commerce, etc. So historically, very often, the physical setting of the business was one and the same with the real business setting and operations, and the family. Only when the industrial age came, there was a widening, meaning that the development of working for a salary for non-family manager began (Walsh, 2011).

Family businesses exist in every part of this world and they are a vital part in the economic development in the countries. Approximately 30% of all companies worldwide with sales over one billion dollars are actually family businesses (HBR Nov 2012). Particularly in Europe, where they are like the "unseen titans" of the economy (Barosso, 2007). The roots of the business and emotional attachment of members for continuity can help in creating a more stable economy and providing safe jobs. Even though these kinds of business have fundamental social and economic influences, family business as a subject of academic study is new and it is yet developing. Academics now began to distinguish the significance of family businesses and their correlation with the entrepreneurship (Poza, 2009). In the globalization years, international corporations enlarge their business territories by breaching into new markets. With the purpose of surviving and being leaders of the industry, the family businesses have to transform themselves or accept new technologies to increase and redeem their effectiveness. Not all companies understand the significance of doing so or know the way how to do so. But anyway, there are a number of companies that are capable to transform themselves effectively.

Literature review

Generally speaking, the family business is the outcome of genuine entrepreneurship, and many of them have been established to meet the requirement for an exact service or product and have acquired the expertise and competence to provide this. Plentiful has by now been written down regarding the strong points and weak points of family businesses, as a parallel to other businesses. For instance, it is regularly said that the strong points consist of an unpretentious passion for and self-importance in the business, a greater enthusiasm to contemplate and invest for the future, and an aspiration for steadiness in terms of interactions with clienteles and contractors. The weak points repeatedly mentioned consist of: a catastrophic strategy for succession, a misunderstanding concerning what is family and what is business, and the difficulties encountered in bringing in and holding managers which are not part of the family (Carlock, Aronoff,2001).

One of the major dissimilarities amongst a family business and any other business is that it is pretty normal in a family business for a family member to be included in the business in a various positions and to "wear several hats". For instance, the member of the family may be: a single stakeholder, a fund manager of a family trust that has possession of stakes in the business, a boss, a member of staff. It is essential for the members of the family to be watchful of the probability of clashes ascending thanks to the diverse positions held in the business. Like a situation where the family member’s responsibilities as a boss clash with his or her responsibilities owed as a fund manager. As a result, the relatives have to be prepared for the possibility for struggle and, if needed, take an advice from a professional.

The uniqueness of the family business

There are four characteristics that make the family business unique: First, there is the faster and more adaptable decision making. Owners of the business time and again are confident that they are more responsive and adaptable than their rivals, which indicates that they are more capable to take advantage of the differences in the market. A number of businesses named the existing economic situation as a business possibility and have been capable to move rapidly to acquire businesses or opponents at low prices. Second, there is the entrepreneurial approach. The owners of the family business have a tendency to be self-driven, courageous, proactive persons, who have confidence in themselves and in anything that needs to be completed. They are usually fulfilled and passionately devoted to what has been accomplished and as a result preserve it in the family. Third, there is the most intimate contact with the business which is created on trust. Family businesses are remarkable for the power of beliefs and morals, which regularly become stronger over a short period of time. Many owners believe that they have succeeded in the family business because they are friendlier with their regulars, and have a more private correlation with them – without a doubt that they are preferred exactly because they are not conglomerates. Last, there is the future planning and the expansive standpoint. The family business is in numerous means the essence of ‘patient capital’, considering that these businesses are prepared to invest for a long period of time , and do not experience any restrictions of the reporting cycle four times a year and the need for fast profits imposed on their rivals. These distinguishing potentials that the family business have represented a foundation of true competitive lead and are essential to their business type. This opinion is equally intense amid those who have been brought in from outside to administer the businesses as it is amongst the members of the family. But it is as well well-defined that other characteristics of this business type can be an obstacle to progress, whether by causing internal disagreement or making it risk averse.

The complexity of the family business

Family businesses are characteristically complex: along with their different kinds of business matters that they are dealing with, there are also the issues regarding the rights and family disputes. This complexity deliberates an incredible strong point – families have principles and look in the direction of all the generations in the future and sustainability, ownership is self-governing and for a long period of time, and the business can implement original business styles. This is the reason why family businesses can, and regularly do overtake publicly held conglomerates. There are three foreseeable phases that family businesses move across, each with its specific interaction of business, rights and family disputes, along with its own culture (Schwass, 2008). These phases are:

1. Entrepreneurial phase: the entrepreneur concentrates on the new business establishment, which is the central topic that needs to be focused on. The culture is that of groundbreaking transformation – the whole thing is new, the whole thing is altered, the whole thing has to be created for the first time. Proprietorship can not be seen as an issue. The family should not be seen as a real issue, too, because the family has a tendency to remain in the background during which the entrepreneur dedicates all the time he has into growing the business.

2. The children of the founders of the business. In this phase, there is a requirement for partnership – the fast evolution of the entrepreneurial phase has to be well-thought-out, and cost-effectiveness comes to the front position. The culture has a tendency to be evolutionary – further development on what the generations before created instead of entirely modifying the business. Ownership converts to a promising, and often sensitive, subject: a few members of the family tend to have equivalent possession of the business, and so, one question arises: what is the situation going to be if one of the family members desired to leave. Still, the biggest problem arises from the family side: the newer generations are attempting to get away from the obedience of the founding generation, wishing to form their own new feeling of personal value.

3. Large families with inherited share in the business. These families have more than a hundred members and in this situation the business must deal with one of the most challenging doubts: is it better for the business to continue with the old way of functioning in the market or is it better for it to become accustomed to the new market demands? As a result, the culture can be progressive, radical, or a combination of the two. The ownership matter truly rises to the front. The members of the family with lesser ownership, who are not actually part in the business, like working, and also who are not members of the board can often be confused about their part in the business (Alderson, 2011). They are usually wandering about should they sell their share and invest the cash somewhere else. Also, it is necessary to adapt to the bigger scale of variety –of interests, circumstances, and requirements – that appears because of the big amount of family members and their spouses.

The three - circle model

The model described below demonstrates the effect of the relatives on the controlling and the rights of family businesses. The three-circle model defines the family business structure as three autonomous but intersecting circles: family, ownership and business.

The ownership subsystem symbolizes the influence that the owners have on the members of the family and on the management process of the organization. The business subsystem symbolizes the influence that directors have on the members of the family and on the owners of the business. The family subsystem symbolizes the influence that the members of the family have on the managers and owners of the business. (Walsh, 2011)

http://catalystconsultingpartners.com/image-files/Family_Business_Model.gif

Source: http://catalystconsultingpartners.com/family-business-consultants.html

The family and its dynamic force is an essential and important component for producing and supporting activities termed as business behaviour or understanding (Sharma, Irving, 2005). Two circles are mutual to all business. The ownership and the business circle. It is not hard to understand how the contact amongst these three subsystems can produce family, ownership, and business disagreements, in addition to offering one of a kind chances. The three- circle model demonstrates in what manner each of the elements act together and in what manner all three circles come across in the middle, showing that at some particular phase of the family business, family, ownership and business are fused as one.

Any person in a family business can be positioned in one of the seven subdivisions that are developed by the intersecting circles. For instance, all title holders, and only title holders, can be anywhere in the circle number 2. In the same way, all relatives are anywhere in the circle number 1, and all workers are anywhere in the circle number 3. The individual who has no more than one correlation to the business will be in one of the external subdivisions (e.g., a relative that is not the owner, and also not a member of staff of the business is going to be in the subdivision number 1). Actually, family business structures are much more complicated, with relatives having numerous correlations to the business: a member of the family who is also a member of staff, but not an owner, will be in the circle number 6, a member of the family who has two functions - an owner and a member of staff will be in the central circle number 7, etc. According to this model, every relative which is a part of the family business can belong in only one location (circle). The effects of this model are tremendously significant for the improvement of strong family establishments. It offers a structure for evaluating, appreciating and developing activities that make the victory even more possible.

The advantages and disadvantages of the family business

The advantages to being a part in the family business are numerous. But very often, this type of business is described as being afflicted by generational and family member clashes, fiscal carelessness, depraved employment and promotional procedures, and constant legal confrontations between the stakeholders (Moore, Palich and Petty,2006). However, the benefits which this type of business offers, can provide a considerable lead among the competitors. Some of them are:

Relatives in business have a tendency to show a better sense of trustworthiness to each other and to the company.

Relatives in business have a chance to build a long-lasting heritage that generates a feeling of triumph and a solid feeling of self-importance.

Relatives also have a tendency to be more adaptable in embracing diverse working tasks and temporary work for others.

The employees which are not part of the family value and appreciate the unique atmosphere. The workplace is not as much official, more pleasant and many workers are considered as extended relatives.

The family business can be an excellent preparation terrain for relatives who seek to go in for business professionals in a different place or in the family business. They also have the chance to grow into executives in the family business.

Profitable family businesses usually offer financial payments to the active and inactive relatives. This is usually seen as one of the benefits of being a family.

The biggest advantages from being a part of the family business can rapidly develop into disadvantages and can generate irreparable destruction within the family if not successfully handled. Some of the disadvantages are:

Relatives can have diverse individual and professional objectives/ideals which eventually can bring needless tension and probable clash amongst family members.

Diverse characters can over and over again initiate sibling competitions which can terminate the family and business coherence, and in particular situations, end the business.

The pride of a family member at any age can damage the business. Unfair advantage or business opportunity given to a member in the company does discourage the non-family workers.

"Throne games" are also a big threat in family businesses. Relatives might start competing with each other for leadership positions in a damaging way for the business. This trouble can get bigger with each new generation increasing the family population.