Transcript Family Business.ppt

Chapter 1
Family Business
What Makes It Unique?
Family Business, First Edition, by Ernesto J. Poza
Copyright © 2004 South-Western/Thomson Learning
Family Business: Working Definition
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A family business is a synthesis of:
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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
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Family Businesses . . .
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Constitute 80–98% of businesses in U.S. and
other free economies
Generate 49% of GDP in U.S. and more than
75% in most other countries
Employ 59% of private sector U.S. workforce
and more than 85% of working population
overseas
Created about 80% of all new jobs in the
1980s and 1990s
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Other Statistics
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Between 17 and 22 million family-owned
businesses in U.S.
Annual revenues exceed $25 million for
35,000 family businesses
Family-controlled companies comprise
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37% of all Fortune 500 companies
60% of all publicly held companies
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The Bad News
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In their first 5 years of operation, 90% of
family-owned companies disappear
Of remaining 10%, 67% die or change
ownership after first generation
Only 12% survive under current ownership
past the third generation
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What Makes the Difference
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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
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Systems Theory
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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 subsystem at expense of others
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Systems Theory Model
Ownership
Family
Management
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Blurred Boundaries
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Boundaries among family, ownership,
management systems may become blurred
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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
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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
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Business-First Firms
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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
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Business-First Firms, continued
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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
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Joint Optimization Alternative
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Family employment policy guides employment of family
Some family members are employees; others
responsible shareholders
Performance of employed family members
reviewed as nonfamily
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Joint Optimization, continued
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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
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Agency Cost Theory
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Traditional theory: Alignment of owners and
managers decreases need for agency costs
Recent research: altruism of ownermanagers 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
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Challenges to Continuity
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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
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Resource-Based Theory
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Resource-based theory highlights unique
capabilities or resources that family firms
convert into competitive advantage
These resources referred to as organizational
competencies
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Competitive Advantages of Family
Business
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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
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Concentrated Ownership
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Ownership structure impacts corporate
productivity
Stock concentration positively correlated to
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Related diversification
R & D expenses per employee
Training per employee
Overall corporate productivity
Source: Hill and Snell, Academy of
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Management Journal, 32#1.
Lower Overall Costs
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Cost of capital is nearly 0% when owner
controls stock
Financing for other businesses:
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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
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Agility and Flexibility
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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
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Owner-Manager
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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
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