Family-Enterprise Management (second part)

By Rodrigo Basco, Ph.D.FEManagement

“Family affects the way an organization is governed and managed”.

If you are not sure about this statement, I would like to invite you to think how many decisions in your life were influenced by your close network (kinship relationships). For instance, think in trivial decisions such as what to order in the restaurant during a family meeting or where to go on holiday when there is already a tradition in the family or what to do during the New Year’s Eve when parents are waiting at home. Decisions are frame by family influences: traditions, what other family members think, values …….

So, why should we expect that family influence is not important in order to make decisions in our family firm, for instance, when we decide to take over our parents in the firm, or when we invest (money and time) in our family firm, or when we decide to go international with our firm, etc? Family members that play an important role in family firms, as decision-makers, are not exempted to be influenced by the family context.

Any family member, within the limits of his/her responsibilities for leading the family business project, is intrinsically affected by three forces: economic, social and emotional forces. The mix or balance of these forces frames the objectives of decision-makers and ultimately affects the way an organization is governed and managed. That is to say that decision-making within family firm is constrained by two clear logics: family logic and business logic. Within family firms the borders of both logics are blurred.

By studying family firms in different countries I found that there are four main of types of family firms based on how the decisions are made by considering the importance of family and business logic and objectives that these logics create: “Family-first firm”, “Family-enterprise first firm”, “Business-first firm”, and “Marginal type of firms”.

Presentation1

  • Family-first firm: These organizations make decisions based on what the family needs to survive and keep the family together. The role of the firm is to provide resources to the family in order to maintain well-fare of their members. Family objectives are dominant in this group of firms, but it does not mean that business objectives are not important. Family-first firms are able to compete in the market being less profitable than their competitors because family-first firms generate competitive advantages based on sunk costs (lower agency problems) and familiness resources (family assets which require less economic payoff) combine with a successful strategic position mainly characterized by close relationship to customers.

 

  • Business-first firm: These organizations make decisions based on what the business needs to compete successfully in the marketplace. The role of the firm is to achieve competitiveness and sustainability. Family brings specific resources to the firm (familiness such as human capital, social capital, cognitive capital, etc.), but the assessment and use of these resources is based on competitiveness. Business objectives are more important than family objectives. Business-first firm is a successful form of organization where it is possible to adjust family resources into the firm to create competitive advantages and correctly exploit them with an strategy based on close relationship to customers and suppliers.

 

  • Family-enterprise first firm: These organizations make decisions based on both family and business needs. Family and business systems are equally important and the balance of business and family objectives is the key survival characteristic of family-enterprise first firm. Family-enterprise first firm is a successful form of organization when decision-making recognizes what the family and the firm bring to each other and what both need to keep the whole system healthy and, indeed, when family and business resources are balanced to exploit competitive advantages by pursuing strategies that support differentiation leadership position.

 

  • Marginal type of firm: These organizations show a low level of maturity, neither business orientation nor family orientation are important when making decisions. Firms in this group lost the direction and are able to survive by the inertia effect of the past generations. The collapse of family-business relationship destroys firm’s competitive advantages. The degradation of the family firm would lead them to the following alternatives: the firm goes bankrupt, the firm is sold, or one branch of the family tree acquires the dominant power to restore the meaning for the family firm.

See Family-Enterprise Management (first part)

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