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How strategy is different for family businesses

"It's important to keep family and business separate. You don't want family circumstances to affect the business. Run the business like a business!"

This advice is frequently given to family business owners. It is quickly accepted by business leaders in the hope that the owning family will leave them alone to manage the business.

Although it is helpful to separate family from business on many issues, it can also be naive and inappropriate to separate them on all topics. Family does play a central role in the formulation and implementation of strategy. Strategy is shaped by creatively melding the demands and opportunities of the business'marketplace with the goals and values of those who own the business. Families who ignore this mixture foreclose special competitive advantages. Non-family executives who ignore this interdependence will likely face an eventual uprising from the owners. Many competent CEOs have found that it is not just the financial results that count, but also how these results were achieved.

Strategy is different for family firms. Research shows that family-controlled firms realise better financial performance than other companies, and they achieve this by following different strategies.

How family businesses differ from other businesses
Family businesses are fundamentally different from other businesses because the family controls both the management and ownership of the firm. The family is a definable, constant, interdependent and emotionally passionate group. Their identifiable and pervasive control gives the owning family both the opportunity and the power to shape the destiny of the firm.

Professional partnerships, religious organisations or governments have much the same distinction. To varying degrees, they have a definable, constant, interdependent and emotionally passionate controlling principle-agent. At best, the family business has a compelling mission and strengthening values; at worst, it has demagogic leadership and political infighting.

How family affects strategy
Consider this case story.

The family founder of a large, industrial instruments manufacturing and marketing company has lived a tumultuous 30 years building the company. Though a naturally talented salesperson, the founder lacked technical know-how, and took in an engineer as a 50% partner. They directed their efforts to the oil refinery market.

After growing the business significantly, conflict with the partner led to a break-up and unstable times for the business. Another engineer-partner was found to take a 50% interest in the business. This new partner introduced instruments that were sold to the chemical processing industry. Subsequently, that partnership broke up and was replaced by another, which opened up a new focus on the food processing industry. This was followed by a fourth, short-lived partnership that developed instruments for the pharmaceutical industry.

With the pain of four failed partnerships and the accompanying business despair, the founder was now forming plans for succession. His three sons and one son-in-law all worked in the business, and he wanted to put the future of the business in their hands.

The founder's family was very closeknit, sharing a religious conviction and living near each other in a small city. In addition to the founder's devotion to building a successful business and consequent independence, his other dream in life was that all his children would be involved in his business and living in the same community together. But the fear of broken partnerships motivated him to design a business structure and strategy that would keep his family together, yet protect against the risk of family conflict. He divided the business into four parts, each with its own product-market focus, and gave each heir their own business to run.

It remains to be seen whether the foreclosed scale of operations will cause strategic harm or whether the devotion of each heir to their own, independent business will create more opportunities. What is evident is that the structure, character and experience of the family shaped the strategic orientation, design and leadership of the company. Specific family factors that affect strategy are discussed below.

Family factors influence several dimensions of strategy including:

- strategic product-market orientation;
- competitive capability;
- organisational design;
- company culture;
- leadership structure;
- resource allocation.

In the case above, the coincidence of four heirs and four market-oriented business units was fortuitous. One wonders if there had been three or five heirs whether the product mix of the business would have changed.

The family had strong feelings favouring both family togetherness and business independence. They preferred separate business units with single leaders, rather than co-presidents, or a firstamong-equals leadership system. In the future, however, resource allocation among the lines of business may well be problematic. Some of these market segments may have different levels of strategic potential and resource requirements than others.

What family factors matter?
Important family factors can be categorised into three dimensions: structure, character and history. Structure describes the demographics of the family, eg size, ages, gender, education. Character refers to the culture or personality of the family. Past experience or history influences what is considered feasible or infeasible.

Structure: Sometimes, family can shape strategy in rather frivolous ways. One business opened branches in the cities where the owner's children wanted to live – with no detrimental effect to the business. Another family started a travel agency for some in-laws in order to support them with sales from the original, core business.

The norm in most societies is for the oldest heir to become CEO of the original core business and the younger heir to lead start-ups. This tendency not only follows a first-come, first-served age logic, but also makes sense from the perspective of birth order personality traits.

Many families design ownership or leadership roles around the ages of the next generation or in consideration of their gender. Some cultures define membership in the family by specific, occasionally religious rules that foreclose roles for married daughters, or for those who marry out of the religion or social class.

When the size of the family becomes large, families can develop policies that make entry into the business very elite in order to regulate the mix of family managers and non-family managers. Sometimes, they take the company to the public stock market in order to provide freedom and liquidity to uninvolved, small shareholders.

Other large families design their governance structure to accommodate more family members. They may attempt to develop future generations into "governing owners", who supervise the culture, strategy and management. That may discourage competition among family branches for line-operating executive roles in the company.

The influence of family structure on the business is clearly visible and for that reason may seem more superficial. Nonetheless it often defines an acceptable range of strategic options.

For example, a business headquartered in Spain makes a product that can only be shipped, economically, approximately 500km. The company successfully dominates its regional market and is exploring growth options. Should it consider purchase of a similar plant in Portugal? Should it add related products to its line and increase sales in Spain? Or should it start up from scratch with a new location in Paris or London?

If the family evaluating these options includes two offspring who are very independent, very entrepreneurial and competitive, and who are already oriented to these other countries, then the answer may be apparent.

On the other hand, the family may be very close emotionally. The two offspring may bring different but complementary strengths to the business, one proficient in operations, the other in sales. Therefore, the likely strategy would be to expand the product line and remain in Spain.

In this case both the structure and the character (ie, emotional closeness or interpersonal rivalry) of the family are at play.

Is it wrong to set a strategy with these considerations? Whatever decision is made must make business sense. But when family factors are taken into account, the owners and company leaders can feel excited and committed to a strategy, improving their chances of overcoming unexpected market obstacles and achieving success.

Character: A more subtle yet important variable is the fit between a business and the family's style and values. Perhaps the best possible strategy is achieved when there is powerful, reinforcing consistency between business strategy and family beliefs. As Terence Deal and Allen Kennedy wrote in their book, Corporate Cultures, "Companies that do the best over the long haul were those that believe in something".

There are ten dimensions of family character that heavily influence the nature of a business. Each dimension has many, complex origins and, within any particular family, there is likely to be variation. Hopefully this list of family cultural tendencies will facilitate some insights into the nature and assumptions underlying the strategies of many family businesses.

The 'adaptability and cohesion'dimensions of a family's character are well studied in the literature of families. The ease of measurement and the clarity of the concepts lend the opportunity to propose an illustration of how these factors can shape strategy.

For example, a family that is inflexible, but close-knit, is likely to prefer a vertical integration strategy requiring limited drive, rather than a diversification strategy that stretches both the family and the business.

A family's 'outlook', its sense of being able to control its destiny, affects its disposition to planning and continuous improvement. The family's internal versus external 'focus'affects where it searches for opportunity. For example, this factor can have an impact on whether a company improves its operations or looks for new markets. It can also impact how a company pursues strategic planning – through incremental planning or holistic planning.

'Motivation'is also an important factor. If those with the most control feel financially insecure, business risk-taking can fall.

'Perspective'on the past or future helps shape the firm's culture, the time horizon of its commitments and the source of management comfort.

If the 'locus of control'is for equality of results, then organisational and resource allocation decisions will be more egalitarian. If it leans towards equality of opportunity, then the company is likely to be more entrepreneurial and merit-conscious.

Attitudes about 'human nature'and the 'locus of control'will be important in the eventual leadership system and organisational design of the business and boardroom. More commitment for collectivism is likely to result in a system with a more effective shared leadership (ie, co-CEOs) and a board more inclusive of family members. A more individualistic system, especially when linked with a locus of control preferring equality of opportunity, may not only lead to more centralised power, but may even lead to a venture capital type of company strategy.

The degree of 'openness'found in family culture has a profound impact on both the strategy and structure of the firm. More trusting families seem more open to joint ventures, public offerings, non-executive leadership, and independent directors on the board. More secretive cultures seem to resist certain governance transparencies and dependencies on external business relationships.

Perhaps the most comprehensive predictor of strategic direction is a family culture's 'orientation'. The trade-off between the best interests of the family and the best interests of the business is a critical factor in strategy selection. Does the family have a business first orientation protecting the strength of the business or a family first orientation that protects the harmony of the family? This orientation, like so many of the factors identified, is often drawn from past experience. If family factors have harmed the welfare of the business in the past, newer generations will feel the need to protect the business, and vice versa.

What is different about family firms is that the family owners are the providers of the goals and values, not management. Character variables identified in Table 2, are a starting point for building a theory on the influence of an owning family on its business strategy and culture.

History: In both of the cases described in this article, strategic decisions were influenced by the past experiences of the families. The instruments manufacturing company had a history of broken partnerships that shaped the design of the organisation and its leadership. The Spanish company resolved its business development questions by reflecting on the past relationships of family members. Often, a family's memory of past decisions, such as coping with recession, creates a competitive advantage over other firms that discard institutional memory.

Family-controlled businesses are different because the nature of their ownership is different. The owners share an identity and an emotional relationship. When the ownership power is used constructively, it permits special strategic opportunities and permeates the strategic decisions of the firm. The owning family's structure, character and history shape several dimensions of strategy – product-market choice, competitive capability, organisational design, leadership structure, company culture and resource allocation priorities.

Long-lasting family-controlled businesses work hard to articulate philosophy and policies governing the interaction of family and business. Their goal is to harness the positive power of families and contain non-productive family factors.

Successful strategy synergistically merges the demands and opportunities of the market with the goals and values of the business owners. In no organisation is this connection more powerful than when ownership is a discreet, identifiable, emotionally interdependent and intensely interested group. The best example of this is the family business. 

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