Ending of the product life cycle Essay
Zahra (et all, 2006)has commented that at the environmental level, the particular cultural and economic setting provides the context for the family business system and the individual. At the organizational level, the family business consists of four subsystems: family, business, ownership, and management. The four organizational subsystems consist of groups that, in turn, consist of individuals business system can be members of only one or of several subsystems and their membership can differ over time.
Hernandez (2007) has attempted to characterize salary and compensation of employees in FOB when compared to ones in non-family firms and professionally managed family firms. The authors suggest that employee compensation differs between firms and argues that the role of ownership concentration and management composition in the firm plays a decisive role. The authors contend that since salary and wages are explicitly defined according to risk sharing and to the interest of the owners, CEO, and employees, the pay mix would be more oriented to variable pay in family owned and managed firms than in non-family firms.
Jensen (et all, 1990) have pointed out that the pay is lesser in FOB owned and managed business than in non-family and professionally managed family business. The author reports that
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The authors also speak of the temporal orientation of incentives, those mainly oriented toward the short term are more common in family owned and managed firms compared to professionally managed family firms and non-family firms, where incentives are designed over a longer term and that temporal orientation of incentives is established in a similar way in family owned and managed firms and in non-family firms. Small firms often suffer the problems associated with asymmetric information and information costs when they seek new financing (Ang, 1992; Ennew, 1994).
In this sense, small family businesses could be affected by the typical problems studied in the theory of pecking order (Poutziouris, 2001). FOBs tend to set their financial policy by a trade-off between tax savings and the likelihood of financial distress derived from debt, as in the trade-off theory (Romano, 2000). Donckels (1999) argues that directors of small and medium-sized family businesses are more involved in corporate finances than their nonfamily business counterparts and that interaction occurs the very moment the business is established through seed capital.
Haynes (1999) reach the conclusion that family businesses use available resources efficiently by developing strategies that link family and business capital, particularly when they are aimed at reducing the tax burden. However, some authors believe overlapping business and family finances can create inefficiency. Such examples include paying out dividends or salaries that are not in line with profits or using personal assets to guarantee corporate loans.
Recently, Poza, (2004), pursuing univariate analysis, highlighted the fact that a positive relationship between firm and family influences managerial and governance practices, suggesting that it could represent a resource for competitive advantage and sustained business performance. Moreover, they noted that the nature of the interaction between family and business significantly contributes to the reduction of potential agency costs. Additionally, Jaskiewicz, (2005) finds that family-owned businesses under perform compared to non-family businesses when they go public via initial public offerings (IPOs), although not significantly.
They obtained evidence on the positive influence that strong family presence in listed companies exerts on their performance. As regards capital structure, numerous studies indicate that family businesses adopt highly conservative strategies, characterized by a stronger preference for using internal resources for financing, less investment in intangible assets, a lower level of debt, a high concentration of capital in the hands of one sole family, and a static ownership structure that leads them to reject the possibility of sharing control of the business with external partners (Gallo, 1996).
Moreover, Gallo, states that a “peculiar financial logic” in family businesses is driven by owner managers’ personal preferences concerning growth, risk, and ownership control that put the company in a difficult situation for competing in the future. The reasons why most family businesses do not survive the second generation can be grouped into five factors (Green, 2002): The business did not reinvent itself. The business could not finance itself. No estate planning. Estate taxes forced the business to sell.
Reviews in the previous sections suggest a few critical factors for success in FOB and they are: Succession issues of future generations should be smooth and beneficial to all stakeholders. The FOB should have a proper financial structure. The FOB should have professional non-family managers who are vested with sufficient decision-making powers. The FOB should be able to attract new people who would bring in new ideas and generate new strategies. Control of the FOB should be given to qualified personnel who are employed and not be default to the business owner.