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What Is a Family Business?

Family Business

A company in whose ownership and/or functioning two or more members of the same family are directly involved

A firm whose ownership passes from one generation of a family to another (succession)

Smith Family Hardware�Est. 1935

Welcome

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The Three-Circle Model of Family Business

Exhibit 5.1

Family

Business

Ownership

Source: Three-Circle Model developed by Renato Tagiuri and John A. Davis. Found in “Bivalent Attributes of the Family Firm.” 1982. Working paper, Harvard Business School, Cambridge, MA. Reprinted 1996, Family Business Review, Vol. IX, No. 2, pp. 199–208.

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Family and Business Overlap

Family Concerns

Care and nurturing of family members
Employment and advancement in the firm
Loyalty to the family

Business Concerns

Production and distribution of goods and/or services
Need for professional management
Effective and efficient operation of the firm

e.g. BAJAJ, MAFATLAL, THAPARS, SRIRAM,

MODI, BIRLAS

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Advantages of a Family Business

Strength of family relationships during challenging periods of business change
Financial sacrifices that family members make for the good of the firm
Higher levels of concern for its community and non-family employees
Emphasis on quality and value

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The Culture of a Family Business

The Founder’s Imprint on the Culture

The founder’s core values become a transmitted part of the culture (for better or worse)

Organizational Culture

Patterns of behaviors and beliefs that characterize a particular firm

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Family Roles and Relationships

Parental Concerns in Passing the Business On:

Does my child possess the temperament and ability necessary for business leadership?
How can I, the founder, motivate my child to take an interest in the business?
What type of education and expertise will be most helpful in preparing my child for leadership?
What timetable should I follow in employing and promoting my child?
How can I avoid favoritism in managing and developing my child?
How can I prevent the business relationship from damaging or destroying the parent–child relationship?

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Family Roles and Relationships (cont’d.)

Husband–Wife Teams

Opportunity to share more in each other’s lives
Business differences interfere with family life
Work doesn’t leave time for family life
Sharing family responsibilities eases the load

Sons and Daughters

Personal preferences different from the business
Personal qualifications insufficient to assume role in business
Desire for personal freedom to choose another career

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Family Roles and Relationships (cont’d.)

Sibling Cooperation, Sibling Rivalry

Best Case: siblings work as a team, each contributing services according to his or her abilities.

Worst Case: siblings compete as rivals and disagree about their business roles.

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Professional Management�of the Family Firm

“Best Practices” (John L. Ward)

Stimulate new thinking and fresh strategic insights.
Attract and retain excellent managers.
Create a flexible, creative organization.
Prepare successors for leadership.
Exploit the unique advantages of family ownership.

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Professional Management�of the Family Firm (cont’d.)

Nonfamily Employees in a Family Firm

Hazards:

Competition with family members for advancement
Getting caught in the crossfire and politics of family competition within the firm

Solution:

Identify family-only reserved positions in advance.
Treat both family and nonfamily employees fairly in matters of reward and promotion.

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The Process of Leadership Succession

Available Family Talent

Mentoring

Guiding and supporting the work �and development of a new or less-�experienced organization member

Allowing only qualified competent �family members to assume leadership �roles in the firm increases the value of �the firm for all who have an ownership �interest in it

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A Model of Succession in a Family Business

Exhibit 5.4

Stage I�Pre-Business

Stage II�Introductory

Entry of Successor

Child becomes aware of facets of firm and/or industry. Orientation of child by family member is informal.

Child is exposed to business jargon, employees, and the business environment.

Stage III�Introductory�Functional

Child works as part-time employee. Work becomes more difficult. Includes education and work for other firms.

Stage IV�Functional

Potential successor begins work as full-time employee. Includes all nonmanagerial positions.

Stage V�Advanced Functional

Potential successor assumes managerial position. Includes all management positions prior to becoming president.

Transfer of Leadership

Successor assumes presidency.

Includes period in which the successor becomes dejure head of company.

Stage VII�Mature Succession

Successor becomes defacto head of company.

Stage VI

Early Succession

Source: Justin G. Longenecker and John E. Schoen, “Management Succession in the Family Business,” Journal of Small Business Management, Vol. 16 (July 1978), pp. 1–6.

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