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Family-Owned Business

Author

Austin Peay State University

Management 5000-W0

Dr. Al Tilooby

February 10, 2023

FAMILY-OWNED BUSINESS 2

Abstract

Family-owned businesses and their services have developed into a significant pillar of society through their numerous contributions. They are an ambitious group on a rapid track to rise to the top of the developing market. Despite having such a flexible structure and strong company culture they often face the difficulty of putting their social responsibility and economic progression over societal welfare, not to mention the ongoing misalignment between family members regarding how to proceed with competition and expansion. Unfortunately, there is not a firm in place to govern or lend guidance to steer these companies forward when they reach internal discrepancies. This downfall results in an economic decline and professional to personal relationship breech, which is why many family-owned businesses do not survive to the next generation. To combat this issue, I have analyzed supporting literature from the ABI/Inform Collection ranging from 2016 to 2023 with consideration to future research opportunities. These scholarly articles provide data, propositions, and the use of various theoretical frameworks to exemplify how critical it is to have both the business and family involved when discussing the company. Incorporating this data analysis with the three-circle model and an inductive theoretical approach I have produced a plan that offers mitigation during problematic times. 

Keywords: Social responsibility, social welfare, Internal discrepancies

Introduction

Family-owned businesses have proven to contribute to economic growth within both developed and developing countries (Anggadwita et al., 2019). They can create employment opportunities, produce major profit returns all while inspiring change. Unfortunately, these businesses are only able to triumph if they can create a balanced family dynamic and a form of administration. The family must develop a defined vision of what they desire for their company while incorporating a framework that embodies the value system of everyone involved. Failure to effectively communicate with one another and establish cohesion amongst their ideas and issues will dictate the volatility of the business when faced with problematic issues.

As a result, they continue to be plagued with the problem of successfully transitioning from one generation to the next. In fact, it is frequently stated that only 15% to 30% of all family-owned businesses survive until the next generation (Nicholson et al., 2016). Thus, starting the company is passing a large milestone, but maintaining and evolving the business is the real provocation (Bung et al., 2014). However, if the family were to correctly design their three-circle model within their business plan they would give themselves a successful lead.

The three-circle model is an establishment of the guidelines for balancing the attributes of family, business, and ownership (Quinn et al., 2020). Applying this model allows for delegation and organization for the family and any other parties involved by establishing administrative roles. Sadly, this information is often overlooked as the company begins to progress and the once assigned roles become cohesive. On the other hand, with the utilization of the mentioned methods, examination of past statistics and combination of knowledge, these family-owned businesses have the opportunity and potential to thrive. The literature review will elaborate further on the three-circle model, control and ownership structure, tangible goals and resources, and liability of risk taking.

Review of Literature

Three-circle method. The three-circle model was founded at the business school of Harvard in 1978 by Renato Tagiuri and John Davis. Since then, it has evolved into a nationwide system used by families to establish a foundation for business development. The key factors of this concept are family, business, and ownership, they work together to evaluate the workplace and managerial culture. Although each factor has its own position they inevitably begin to overlap causing four subcategories to develop, creating seven total groups of interest. These seven groups being non-family non-manager owners, family owners, non-family owner employees, family owned-employees, family members, family employees, and non-family employees. The purpose and role of each the members is then taken into consideration with respect to their personal and professional interest. In doing so, this generates complexity to the family business structure, even if they are a smaller company (Hoffman et al., 2019). Even though the three-circle model has the benefit of simplifying categorization for family businesses, it does not include the concentration of events after the sections are arranged.

Control and Ownership Structure. The managerial cultural of family-owned businesses is causes the control and ownership structure of the company to be unique based on its social values and strong sense of hierarchical structure (Norhan, 2021). An individual must hold the majority stake in order to possess control or have a strong influence on the company. This results when the family fails to effectively communicate or participate and hold their share or stake in the company (Drewniak, et al., 2020). Sadly, there is little data to support the process or timeline on how a business should alter their leverage and ownership designation (Mbanyele, 2020). This is a supportive reasoning to why family businesses should take the time to invest in themselves and become more innovative so that they are prepared to face these problematic issues and maintain balance within the structure of their firm (Xiao, et al., 2022)

Goals and Resources. The formation of family business goals and interest are the foundation of what their company is built on. The primary reason of most business developments is to generate a stream of financial income and develop wealth . Additionally, it should be noted that today's family businesses recognize how economic development is highly dependent on the environmental sustainability (Liu et al., 2022). The demand of the environmental can pose a significant challenges to family firms, so, them taking into consideration their approach to innovation whether it be saving energy or preserving natural resources shows their dedication (Forés, et al., 2022). As a direct result, consumers have also slowly become more attentive and drawn to environmentally friendly companies (Hong et al., 2018). They notice the intentions the company has as well as the strides they are taking to have a greater impact on the environment.

When choosing to make this commitment, these small owned businesses also open themselves up to the interests of societal well-being and responsibility. In doing so, the business brings relevance to itself considering social responsibility has become extremely popular over the last few years (Iaia et al., 2019). The ability to give back and recognize society not because your told to do so but because you take interest in the welfare of those who embody the environment. Whether it be an act of charity, volunteer work or altering company policy to benefit the environment, customers pay attention to those who care and take the opportunity to lend their support, thus creating greater financial opportunities. However, if the business desires to take the relevance of their brand to the next level it would be in their best of interest to promote their efforts through online social networking platforms.

Liability and Risk Taking. Considering small businesses are not backed by large corporations every move they make is considered a liability. They rely on the funds they put forward to carry the company until they reach a certain level of success and begin to gain profit. Thus, one wrong move and the business could rapidly devolve and there would be nothing left. So, it becomes imperative to take all profitable opportunities into consideration, while effectively communicating amongst one another. As previously mentioned one of the more prominent methods of self-promotion would be social networking. This must be taken into consideration considering the use of social networking considering it has become notable element and gateway for consumers to express their feedback while allowing businesses the ability to gain insight for product and service development. Not to mention, it gives them the chance to analyze what is in demand so that they may take the initiative and provide what the consumers desire (Naeem., 2019). On the downside, they could potentially open themselves to a liability issue considering the increase amount of security of privacy breeches. Referencing back to the startup cost being funded by the family itself refers to the fragile state of the company in the beginning. Unfortunately, in some cases the founder does not have the collateral to invest so they must take on various loans and other forms of debt. Not to mention, they are responsible for the employee wages and salary, including settlement pay if any worker were to incur a personal injury while on the business property. In fact, a panel data sample of 2093 companies, 1434 being family business concluded that family-owned businesses are more likely to take on debt then a non-family business (Acedo-Ramírez et al., 2017). Thus, there is the question of what can be done to help family-owned businesses advance and carry their legacy on to the next generation.

References

1. Acedo-Ramírez, Miguel Angel, et al. “Determinants of Capital Structure: Family Businesses versus Non-Family Firms.” Finance a Uver, vol. 67, no. 2, 2017, pp. 80–103. ABI/INFORM Collection, http://ezproxy.lib.apsu.edu/login?url=https://www.proquest.com/scholarly-journals/determinants-capital-structure-family-businesses/docview/1894907687/se-2?accountid=8437. Accessed 11 Feb. 2023.

2. Anggadwita, Grisna, et al. “Cultural Values and Their Implications to Family Business Succession: A Case Study of Small Chinese-Owned Family Businesses in Bandung, Indonesia.” Journal of Family Business Management, vol. 10, no. 4, 2020, pp. 281–292. ABI/INFORM Collection, https://doi.org/https://doi.org/10.1108/JFBM-03-2019-0017. Accessed 10 Feb. 2023.

3. Bung, Purushotham, and Kirti Shivakumar. “R.N. Food Products: Challenges of Entrepreneurship and Family Owned Businesses.” FIIB Business Review, vol. 3, no. 4, 2014, pp. 43–48. ABI/INFORM Collection, http://ezproxy.lib.apsu.edu/login?url=https://www.proquest.com/scholarly-journals/r-n-food-products-challenges-entrepreneurship/docview/1970563038/se-2?accountid=8437. Accessed 10 Feb. 2023.

4. Drewniak, Zbigniew, et al. “Succession and Ownership in Family Businesses.” European Research Studies, vol. 23, no. 4, 2020, pp. 638–654. ABI/INFORM Collection, http://ezproxy.lib.apsu.edu/login?url=https://www.proquest.com/scholarly-journals/succession-ownership-family-businesses/docview/2464177723/se-2?accountid=8437. Accessed 11 Feb. 2023.

5. Forés, Beatriz, et al. “Unveiling the Direct Effects of Family Firm Heterogeneity on Environmental Performance.” Sustainability, vol. 14, no. 16, 2022, p. 10442. Coronavirus Research Database; Publicly Available Content Database, https://doi.org/https://doi.org/10.3390/su141610442. Accessed 11 Feb. 2023.

6. Hoffmann, Davi Laskani, and Alvair Silveira Torres. “Lean Development Evaluation in Small Brazilian Company.” REGE. Revista De Gestão, vol. 26, no. 4, 2019, pp. 429–454. ABI/INFORM Collection; Publicly Available Content Database, https://doi.org/https://doi.org/10.1108/REGE-04-2018-0058. Accessed 11 Feb. 2023.

7. Hong, Lucheng, and Angela Chao. “Strategic Corporate Social Responsibility, Sustainable Growth, and Energy Policy in China.” Energies, vol. 11, no. 11, Nov. 2018. Publicly Available Content Database, https://doi.org/https://doi.org/10.3390/en11113024. Accessed 11 Feb. 2023.

8. Iaia, Lea, et al. “Family Businesses, Corporate Social Responsibility, and Websites: The Strategies of Italian Wine Firms in Talking to Stakeholders.” British Food Journal, vol. 121, no. 7, 2019, pp. 1442–1466. ABI/INFORM Collection, https://doi.org/https://doi.org/10.1108/BFJ-07-2018-0445. Accessed 11 Feb. 2023.

9. Liu, Hui, and Fu-Sheng Tsai. “Socio-Emotional Wealth, Innovation Environment, and Innovative Investment Path of Family Enterprises: Implications for Environmental Accountability.” Journal of Environmental and Public Health, vol. 2022, 2022. Coronavirus Research Database; Publicly Available Content Database, https://doi.org/https://doi.org/10.1155/2022/3759456. Accessed 11 Feb. 2023.

10. Mbanyele, William. “Ownership Concentration, Firm Life Cycle, and Leverage: Evidence from Italian Family Firms.” Cogent Economics & Finance, vol. 8, no. 1, Jan. 2020. ABI/INFORM Collection; Publicly Available Content Database, https://doi.org/https://doi.org/10.1080/23322039.2020.1838687. Accessed 11 Feb. 2023.

11. Naeem, Muhammad. “Do Social Networking Platforms Promote Service Quality and Purchase Intention of Customers of Service-Providing Organizations?” The Journal of Management Development, vol. 38, no. 7, 2019, pp. 561–581. ABI/INFORM Collection, https://doi.org/https://doi.org/10.1108/JMD-11-2018-0327. Accessed 11 Feb. 2023.

12. Nicholson, Lawrence, and Lila Rao-Graham. “Knowledge Management Systems for Small Family-Owned Businesses-The Case of the English-Speaking Caribbean.” Social and Economic Studies, vol. 65, no. 2/3, 2016, pp. 133–159,221–222,227. ABI/INFORM Collection, http://ezproxy.lib.apsu.edu/login?url=https://www.proquest.com/scholarly-journals/knowledge-management-systems-small-family-owned/docview/1992247951/se-2?accountid=8437. Accessed 10 Feb. 2023.

13. Norhan, Nik Intan. “The Moderating Effect of Family Business Ownership on the Relationship between Short-Selling Mechanism and Firm Value for Listed Companies in China.” Journal of Risk and Financial Management, vol. 14, no. 6, 2021, p. 236. ABI/INFORM Collection; Publicly Available Content Database, https://doi.org/https://doi.org/10.3390/jrfm14060236. Accessed 11 Feb. 2023.

14. Quinn, Martin, et al. “Accounting for Family and Business Overlaps.” Journal of Management History, vol. 26, no. 2, 2020, pp. 249–276. ABI/INFORM Collection, https://doi.org/https://doi.org/10.1108/JMH-04-2019-0032. Accessed 10 Feb. 2023.

15. Xiao, Wei, and Ling Chen. “Dispersion of Family Ownership and Innovation Input in Family Firms.” Sustainability, vol. 14, no. 14, 2022, p. 8418. Publicly Available Content Database, https://doi.org/https://doi.org/10.3390/su14148418. Accessed 11 Feb. 2023.

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