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Family Businesses Essay

A family business is one where one or more members of the family have an ownership interest and commitment in the business. A business is said to be a family business if one person is the controlling shareholder of the assets or shares of the company. Individuals who are not members of the family can run family businesses but family members make major decisions concerning the operations of the business. Davis and Taguiri (as cited by Bellet et al, 2005) have provided a more detailed definition of this term.

They define a family business as an organization where two or more extended family members influence the direction of the business by using their family links in management and ownership roles. In the U. S. , Europe, South and Central America, family businesses play an important part in the economy of the country. Families run Ninety percent of businesses in the U. S. Such businesses embody the entrepreneurial spirit of a country.

There have been many misconceptions about family run businesses with many assuming it is a father and mother affair. Although many small micro businesses are family owned there is evidence that many of the large and successful firms emerging in the

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market are family owned. Examples of successful family businesses that are well known around the world include Ford Motors Company, Gucci, Estee Lauder, Wal-mart stores, Hyundai motors, BMW (Bayerische Motoren Werke), Samsung, Motorola and LG companies (Bellet et al, 2005).

Colli (2002, p. 9), views family businesses as only one of the initial stages in the life cycle of an organization. His definition of the family business is that it is a firm in which property and control are firmly entwined and where family members are involved in both the strategic and day-to-day decision-making activities and operations of the business. Background of the concept of Family Business From a historian’s point of view, family businesses are not that new.

The concept first emerged in the manufacturing industry of the United States between the 1870s and the 1890s. It stimulated by the technological advancements and innovations in the transport and production sector, which referred to as the second industrial revolution. Chandler and Hikino (as cited by Colli, 2002) noted that the family business concept then spread to the capital intensive industries that dealt with transport, chemicals production, electrical products, petroleum refinery and some areas of the food and beverage industry.

The dimensional growth and the complex activity that linked production and distribution triggered an organisational revolution where the relatively simple organisational structures that were used during the first industrial revolution evolved into the sophisticated U and M organisation structures. These management structures were characterised by lowly paid middle and top-level managers who had autonomy from the founding family and their property because of the growing specialisation in their duties and responsibilities (Colli, 2002).

The growth of corporations demanding more investments and financial resources brought on a shift from personal or family capitalism to financial capitalism where bankers and other organization financiers made the top management decisions within companies. In the end though, given the complex activities that were undertaken by the new modern enterprises, the managers had the ultimate responsibility for allocating resources and making relevant strategic decisions (Colli, 2002).

According to Chandler (Cited in the work of Colli, 2002) no family business or financial institution was large enough to staff the various managerial hierarchies required to administer the modern multiunit enterprises. The salaried managers who had a developed specialised knowledge of the business eventually took over the top level decision making activities from the owners or financiers of the business who rarely had time, lacked information or experience to make management decisions or propose alternative methods.

As a result, family members came to view the organisation from the point of view of renters since their interest in the organisation was no longer in management but in how much income and profits it was able to generate. The changes in the ownership structure of the large organisations showed that there was a growing separation between ownership and control as well as the fragmentation of stock ownership. With the rise of the managerial corporation, the transformation experienced in the industrial enterprise spread to other parts of the world bringing about a revolution in the competitive advantage among countries.

The transformation brought about the birth of the modern business enterprise, which was defined as an economic institution that owns and operates a multiunit system that relies on a multilevel managerial hierarchy (Daems, 1980 as cited by Colli, 2002). The Relationship between Entrepreneurship and Family Businesses The relationship between entrepreneurship and family businesses shows that family businesses are vital and provide supportive environments for entrepreneurial behaviour.

Research on entrepreneurship activities has shown that family support and the presence of self -employed parents is an important influence in the founding and ownership of a business. According to Sexton and Bowman-Upton (cited in the works of Bellet et al, 2005) an entrepreneur is a person who can recognize an opportunity in the market place and look for the necessary resources to exploit that opportunity for his long term personal gain. Entrepreneurship is viewed as the integral part in most family run businesses. The phenomenon of an entrepreneurial family fosters and enhances the efforts of its members who take part in it.

Past research on the entrepreneur’s personality has shown the important role that the entrepreneur’s family plays in the development of certain entrepreneurial characteristics. In their work, Collins and Moore (as cited by Dyer & Handler, 1994) noted that the childhoods of most entrepreneurs they studied were filled with a lot of insecurity poverty and child neglect. Entrepreneurs who have experienced such a childhood have a desire to create and control their own businesses in order to overcome what they experienced.

A person with this personality also affects how the entrepreneurial firm performs by influencing the decision-making process, employee reactions and successive planning. Entrepreneurs are also most likely to emerge from families where the parents were also entrepreneurs or self employed (Dyer & Handler, 2004). The relationship of the entrepreneur’s family to the business is an important factor to the success of the business. The initial capital usually generated from family assets and personal finances. A family member might also be involved in the start-up and running of the business as a partner or as a member of the entrepreneurial team.

This might lead to more members coming in to help with the running of the business. Economic value of Family businesses Researchers have noted that almost 90% of businesses owned in the United States are family managed and controlled. The economic value that these businesses provide is enhanced by their tendency toward focusing on the long term strategies instead of the short term. A number of studies that have been carried out have shown that family businesses outperform other companies in the same industry group.

In 1969, Monsen (as cited by Bellet et al, 2005) found that family owned businesses had a net income that was 75% higher than businesses controlled by managers. His conclusion was that the family run firms provided a greater return on investment, had a better managed capital structure and efficiently allocated and used their resources. A study carried out in 1986 by the United States News and World Report found that out of the 47 family owned businesses, 31 outperformed the Dow-Jones Index in the New York Stock Exchange Market.

In Germany, 75% of workers employed by family businesses contribute 66% of the Gross Domestic Product. These companies are viewed as the backbone of Germany’s economy. In Australia and Chile, 75% of the companies, owned and managed by families contribute to the employment and Gross Domestic Product levels of these countries (Bellet et al, 2005). The Societal Value of Family Businesses Family firms have a direct impact on the self-sufficient aspect of the society and its workers.

Novak and Jaffe, in their work of 1990 (as cited by Bellet et al, 2005), point out that the basic economic and social building blocks of a country are the families that create, control and operate businesses. The characteristics of individual entrepreneurs, their family backgrounds, culture, ethnicity and community involvement are the basis on which majority of businesses are built and managed. These businesses remain to be a force in the development of societal socioeconomic systems. Family businesses are considered the recharging of stagnant economies around the world.

Benedict’s 1968 multicultural research revealed the critical nature of a family business primarily in developing economies that are still growing (Bellet et al, 2005). His studies led him to the conclusion that the family enterprise cannot be matched in terms of its potential for taking on risks, its ability to access capital and the development of human resources when compared with the large public or privately owned entities. Just as families are the building blocks of a stable society, family businesses are important in the building of a stable economy.

A family business by its very nature is in a better position than other businesses to re-invest in itself to provide support and perpetuate wealth for future generations. It has the capacity to make long-term investments while at the same time resisting pressure from financial analysts who burden the manager run corporations. The characteristics of a family business that contribute to higher levels of risk taking, innovation and productivity can logically be extended to the increasing levels of productivity and personal responsibility in the community and the society.

Researchers who have studied family firms argue that consumers and jobseekers prefer them because they give more priority to customer service and they offer greater employment opportunities to women. They also respect tradition and take great care of their employees (Bellet et al, 2005) Challenges of Family Businesses Succession is a major problem for most family run businesses. The problem of ownership and management succession has been the basis of research on family owned businesses. Family dynamics play a central part when the issue of succession arises.

In the case of the entrepreneur, succession planning is seen to be in direct conflict with the entrepreneur’s need for control and power. Lansberg suggests that the family, managers of the family business, suppliers and the customers might play a significant role in colluding against succession planning (as cited in the work of Dyer & Handler, 1994). Family members might not want to accept that the founder of the business is retiring because they see him or her as the only person who is able to manage conflicts that might arise in the business and the family.

They are therefore reluctant to see them retire. Suppliers and customers who are used to dealing with the founder of the business might find it hard to form another relationship with the next generation family who succeeds the founder in the managing of the business. It is therefore not surprising to learn that few business owners engage in succession planning. Past studies suggest that once the succession process begins, be it intentional or unintentional, several dynamics related to the family occur.

The first to happen is a struggle within the family for control of ownership, which is a result of family members having very different needs and goals for the enterprise. Another issue is that the founder might leave assets to the family in a way that makes governance of the firm to be impossible, destroying family harmony (Dyer & Handler, 1994). As much as family businesses are better than the manager controlled businesses, they are more prone to family feuds. Such feuds might arise when there is no consensus on important matters because everyone in the family has their own opinion as to how the business should be managed.

In such a case, the problems affecting the family can affect the business, undermining its competitiveness resulting in a loss of market share to its competitors. In some cases the family and business when put together leads to deep contradictions. The process of change in business leadership might cause problems to the point of traumatic shock and genuine risk to the firm’s survival (Colli, 2002, p. 66). Leadership succession and corporate governance are aspects of a more general problem involving the values and culture of family firms in a rapidly changing environment.

In a rapidly evolving environment, the presence of strong values and a consolidated corporate culture are strong assets against uncertainty. A downside to this is that firms develop an inward looking culture instead of an outside one. The preference for inside succession can delay the dynamism and innovation of the business. It can also be an obstacle to change (Colli, 2002) Conclusion During the last decade, family businesses have taken a centre stage in debates and studies that are concerned with organisational change in business.

Despite the various convergence theories, the family business has been a critical element in the industrialization process from the first industrial revolution to the post-industrial era. A significant number of family businesses have been able to adapt to the transforming markets and technological industry while maintaining leadership at the same time. There is abundant historical evidence that the long-term resilience of family owned businesses requires the ability to institute changes and the willingness to adapt to the current market conditions.

Long lasting family businesses have been able to succeed because of their pursuit of survival strategies. This has been based on their continuous search for survival and compromise between the aspirations of the family members and the constraints imposed by market competition and institutional, legal systems. This has enabled these businesses to combine the virtues of trust and long-term commitment with creative methods of entrepreneurship and management. References Colli, A. (2002) The history of family business, 1850-2000, United Kingdom: Cambridge

University Press. Pp. 6, 9, 66, 71, 72 Bellet, W. , Dunn, B. , Heck, R. K. Z. , Parady, P. , Powell, J. & Upton, N. B. (2005) Family business as a field of study. Cornell University Family Business Research Institute, Bronfenbrenner. Retrieved on 5 May 2010, http://www. fambiz. com/Orgs/Cornell/articles/real/ifbpa. cfm Dyer Jr, W. G & Handler, W. (1994) Entrepreneurship and family business: exploring the connections. Journal of Entrepreneurship, Theory and Practice. Vol. 19, Issue: 1, Gale Group

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