Family Businesses

Advantages

A family business offers the following advantages:

• One of the popular misconceptions about family businesses is that they are unable to adapt easily to increasing competitiveness and technological progress. The reality is that family businesses frequently have the advantage of entrepreneurial spirit, flexibility, and opportunism.“Myths and Realities of Family Business,” 2002, accessed October 8, 2011, www.insead.edu/discover_insead/publications/docs/IQ03.pdf.
• It is believed by some that family firms are “too soft” and rarely reach their potential. The reality is that family businesses actually outperform public companies. Oftentimes, the marketplace forces public companies to make short-term decisions, whereas a family business has the advantage of having more freedom to make its decisions. Family businesses can adapt to market fluctuations more easily because they can afford to be patient. They have common goals, shared values, and a commitment to brand building.“Myths and Realities of Family Business,” 2002, accessed October 8, 2011, www.insead.edu/discover_insead/publications/docs/IQ03.pdf.
• Family-owned businesses are often seen as ideal because family members form a “grounded and loyal foundation” for the company, and family members tend to exhibit more dedication to their common goals. “Having a certain level of intimacy among the owners of a business can help bring about familiarity with the company and having family members around provides a built-in support system that should ensure teamwork and solidarity.”Alexis Writing, “Pros and Cons of Family Business,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/pros-cons-family-business-409.html.
• The culture of a family business is very different from that of a company you will find on Wall Street. “Family businesses frequently take a very long-term point of view. They’ll make investments that they don’t expect to pay off for 5 or 15 or 25 years…Culture in a family business is more frequently based on very personal and emotional values. It’s stronger because there are deeper roots and closer connections to the history of the company.”Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, accessed June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• Family businesses are becoming more and more attractive to undergraduate business students who face a bleak job and salary outlook for new grads. These undergrads are choosing to return to their family businesses directly after graduation instead of trying to find a job in corporate America or on Wall Street.Alison Damast, “Family Inc.: The New B-School Job Choice,” Bloomberg BusinessWeek, April 12, 2010, accessed October 8, 2011, www.BusinessWeek.com/print/bschools/content/apr2010/bs20100412_706043.htm.
• There is a common misperception that family businesses are less professional and rigorous in their behavior because of the relational nature of the businesses.“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf. However, like all other businesses, family businesses face global competition and rapidly changing markets. This creates more pressure on those who join to make sure that they produce. “This emphasis on professionalism has made family businesses both more daunting and more attractive—and has created new interest in them, from family members, outsiders, and business school students.”Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, accessed June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• Many family-owned businesses tend to be stable and optimistic, even when economic times are uncertain. They seem to be better able to weather economic difficulties and stabilize the economy than their nonfamily counterparts.“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf. However, this is a function of the industry and the size of the business.
• In general, family businesses feel that they are stronger because family members are involved in their activities. Family owners believe that their family members can be trusted, will work harder, and care more.“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, http://praxityprod.awecomm.com/News/2009/Pages/UKFamilyBusinessSurvey.aspx. This can help create competitive advantage in the marketplace.
• Family businesses may be more open to flexible or part-time schedules or choosing your hours. This presents a very attractive work environment for people who need to tend to children, parents, or other family members in need.Alexis Writing, “Pros and Cons of Family Business,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/pros-cons-family-business-409.html.
• Family businesses tend to operate more ethically. In fact, many family businesses believe that their ethical standards are more stringent than those of their competitors. In addition, family businesses are often deeply embedded in their communities, and this proximity is seen as an important factor that increases the likelihood of ethical decision making and moral behavior.“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf. As members of the local community, any ethical problems with a family business will be quickly visible.
• Family businesses also exhibit more social responsibility than their competitors. This has been attributed to their concern about image and local reputation“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf. as well as their closeness to the community.
• Family businesses may incur lower costs because of the greater willingness of family members to make financial sacrifices for the sake of the business. Accepting lower pay than they would get elsewhere to help the business in the longer term or deferring wages in a cash-flow crisis are examples of family altruistic behavior.“Advantages of Family Businesses,” Business Link, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?itemId=1073792650&type= RESOURCES.
• Family businesses, in general, have greater independence of action because they have less (or no) pressure from the stock market and less (or no) takeover risk.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics21, no. 3 (1993): 59–71.
• Family businesses tend to be more resilient in hard times because they are willing to plow profits back into the business.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Family businesses are less bureaucratic and less impersonal, which allows for greater flexibility and quicker decision making.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Family businesses offer the possibility of great financial success.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics21, no. 3 (1993): 59–71. This can manifest itself in interesting ways. “As the family of a media conglomerate once mentioned, ‘The name I have has certainly helped me to get access to top executives of companies, persons who under other circumstances would have kept their doors shut.’”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Family members have the chance to learn the business early. This extensive expertise can create an important competitive advantage.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. “One executive recalled how as a child he would take long walks with his father, during which they would visit stores to look at competitor’s products. Afterwards, his father would ask him which products he liked most, and this would lead to lengthy arguments about each product’s quality. This man felt that the expertise he gained during those informal outings proved invaluable later in life.”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.

Disadvantages

As attractive as family businesses are on many fronts, they have the following disadvantages:

• Family businesses tend to be stable organizations. Although this is a good thing in many instances, stability can also make it difficult to change. A new, younger family member coming into the business will find tradition and structure. Changing that is not simple. The key to changing a family business lies in defining tradition in terms of the company’s core values, not in specific ways of doing things.Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, accessed June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• Family closeness can lead to sibling rivalry or problems when both the parent and the child want control. By the third or fourth generation, with many cousins possibly sharing ownership, governance can become very complicated.Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, accessed June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• There may be times when the interests of a family member conflict with the interests of the business. One family member may want to expand the business, but other family members may not share this person’s desire. The needs of the business are not in sync with the needs of the family.
• Family ties have a downside. Family members will frequently be expected to work harder, make more of a commitment, and get paid less than other employees in the business.“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, http://praxityprod.awecomm.com/News/2009/Pages/UKFamilyBusinessSurvey.aspx.
• Family business owners may automatically promote someone from the family or give family members a job even if they do not have adequate skills for the job. A nonfamily employee may be better qualified.Alexis Writing, “Pros and Cons of Family Business,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/pros-cons-family-business-409.html. This can cause dissension and resentment among other employees.
• Relationships between parents and children or among siblings have a tendency to deteriorate due to communication problems. “This dysfunctional behavior can result in judgments, criticism and lack of support.”Alexis Writing, “Pros and Cons of Family Business,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/pros-cons-family-business-409.html.
• The family business may be a breeding ground for jealousies, resentment, anger, and sabotage. Family problems may spill over into the workplace.“Advantages and Disadvantages of a Family Business,” September 6, 2009, accessed October 8, 2011, pinoynegosyo.blogspot.com/2009/09/advantages-and -disadvantages-of-family.html.
• The business may be plagued with managerial incompetence, the lack of exposure to other businesses, and the inability to separate family and work.“Advantages and Disadvantages of a Family Business,” September 6, 2009, accessed October 8, 2011, pinoynegosyo.blogspot.com/2009/09/advantages-and -disadvantages-of-family.html.
• Some family businesses may have difficulty attracting and keeping highly qualified managers. “Qualified managers may avoid family firms due to the exclusive succession, limited potential for professional growth, lack of perceived professionalism, and limitations on wealth transfer.”David G. Sirmon and Michael A. Hitt, “Managing Resources: Linking Unique Resources, Management, and Wealth Creation in Family Firms,” Entrepreneurship Theory and Practice, Summer 2003, 339–58. Succession refers to passing the business to the next generation.
• Family businesses have limited sources of external capital because they tend to avoid sharing equity with nonfamily members.David G. Sirmon and Michael A. Hitt, “Managing Resources: Linking Unique Resources, Management, and Wealth Creation in Family Firms,” Entrepreneurship Theory and Practice, Summer 2003, 339–58. Having less access to capital markets may curtail growth.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.

• Not all children of owner-managers may want to join the business. According to one study,Sue Birley, “Attitudes of Owner-Managers’ Children towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19. 80 percent of those who did not work in the family business did not intend to go into the business. This reluctance comes from several directions, such as the following:

  • My parents would not want me to join.
  • I could not work for my parents.
  • There are already too many family members in the business.
  • I am not interested in this particular business.
  • The business is too small for me.
  • The business would not allow me to use my talents.
  • The business would not allow me to use my training.
  • I can earn more elsewhere.
  • I am not interested in a business career.Sue Birley, “Attitudes of Owner-Managers’ Children towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19.

• The “spoiled kid syndrome” often occurs in a family business. The business owner may feel guilty because his devotion to the business takes away from the attention he should be giving to his children. Out of a sense of guilt, he or she starts to bribe the children, “a kind of pay-off for not being available emotionally or otherwise.”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Financial strain emanating from “family members milking the business and a disequilibrium between contribution and compensation”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. can have a significant negative impact on the business.
• Nepotism that results in the “tolerance of inept family members as managers, inequitable reward systems, [and] greater difficulties in attracting professional management”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. can easily lead to low morale among nonfamily members of the business, and it can ultimately result in business failure.
• Family businesses frequently have a confusing organization, with “messy structure and no clear division of tasks.” Authority and responsibility lines are unclear; jobs may overlap; executives may hold a number of different jobs; and the decision-making hierarchy may be completely ignored, existing only to be bypassed.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. This can create a dysfunctional working environment.
• Family businesses frequently have paternalistic or autocratic rule that is characterized by a resistance to change, secrecy, and the attraction of dependent personalities.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.