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Is the Family Aspect a Competitive Business Edge?

Family firms are the most common form of businesses in the world. It almost seems natural for an entrepreneur to start up a business and for his children to take it over after him, whether it was a small corner store or a large conglomerate. However, when family businesses are discussed, the first things that come to mind, apparently, are the disadvantages and challenges that come with the family’s presence, especially if the businesses were large. Separating ownership from management becomes the slogan for many. Others promote replacing family management with professional management. Is the family’s presence really that bad? And are the family managers not professionals themselves?

Well of course not and we all know that. It’s just that this negative bandwagon is easy to jump on. The only way to put a stop to it is to counter it. To do that, we need to gain awareness of what value a family could add to its business as well as the challenges it could create. With this knowledge and awareness, the former could be capitalized on and the latter overcome. The first step would be to ask: how could a family serve its business? And what would a family member bring to a certain position that another person from outside the family and with the same qualifications couldn’t bring in? The answers to both questions involve investigating the ‘value creation’ aspect of a family’s presence in its business.

This passing decade has seen a significant amount of research done on comparing the performance of family firms with non-family firms. The majority of the findings are that family firms outperform their non-family counterparts. And to be completely clear here, each research has its own parameters and criteria, market researched and time frame. But since the result is almost unifying, this diversity only reinforces it. So what does the family bring to the table? It is what some researchers call ‘familyness’ while others use the term ‘family capital’. Both terms refer to the intangible resources and relationship-based interactions that are unique to families and could translate into a business competitive advantage.

Family businesses are undoubtedly complex in their nature, however, there is a byproduct to this inherent complexity. That is, each family member working in the business brings their own individual talent, knowledge, experience and social network. And as a family business, individual members are able to act as a single unit bringing all these resources into one wealthy pool of intangible resources. Discussing some aspects of those resources will hopefully remove the ambiguity of the concept of ‘familyness’ of family firms.

The most obvious of such resources is the family name. Family members normally show high motivation and commitment resulting from the sense of loyalty and belonging that comes with the fact that family’s name hangs outside the building. Thus, you would find them more willing to work longer hours with greater work ethic and attitude. There is also more flexibility in the type of roles and work assigned to family members as long as there is a sense that it will help in the overall business success. And when compensation is concerned, research has found that family CEOs receive significantly less financial incentives for their roles than non-family CEOs. This also is applicable to most other posts within the business. However, some may argue that those family members receive financial compensation through share ownership which could explain the extra motivation for less pay. But then again, all shareholders of all companies expect some financial gain, especially those that give out massive pay cheques to their top management. Therefore, the main argument still remains strong, that the presence of owning family members in the business generates a sense of pride and loyalty and constitutes a powerful competitive advantage.

Another valuable asset embedded in the family name is the goodwill it generates. If the family name becomes the brand used for the business or the goods and services it provides, and if those goods and services are known for their quality, a positive image normally generates among stakeholders. This constitutes an essential part of the social capital a family business possesses. There is an actual personal face to the family business that is very unlikely to exist in non-family businesses. This means that different stakeholder groups (e.g. suppliers, customers, employees, banks) would prefer dealing with a member of the owning family rather than a non-family manager, greatly due to the perception that they would have more power to return favors made in the hope of building a long-term relationship. A few good business transactions between those stakeholders and the family could easily evolve into a long lasting personal friendship and attachment that would continue for generations. There will be trust in the family name and a sense of comfort linked to doing business with them. This is simply because commitments made by the family to a stakeholder are usually shared by the entire family, unlike individual commitments which last only as long as the individual does. Those strong family relationships come in very handy in times of hardship and this is another example of how the family name is a strong business competitive advantage.

Knowledge transfer is a field where family businesses excel over others. One of the most valuable assets a family business owns is the tacit knowledge held by the family members. This is the gut feeling acquired through years of experience in the business and passed down from one generation to another. In many ways it can be compared to a family heirloom. Both passed down the generations of a family and both have significant value unique to this family. An important characteristic of such knowledge is that it is very hard to replicate or codify, making the family’s presence or influence imperative to its existence and perpetuity. This pool of knowledge and experience directly influences decision-making and strategic planning. It renders family businesses more patient with a long-term view and more able to face economic downturns. At times of recession and when businesses tend to cut down on investments, those family businesses armed with their knowledge and experience of economic cycles would make investment decisions that may appear to be foolish at the time, but it would bring them out of that recession with a whole new strategic advantage.

The way that this treasure of knowledge is passed down through the generations is in many cases inadvertent and in others so simple it may even appear trivial to some. It all starts with daddy taking junior to work with him and making him familiar with the people and places where business takes place. This then turns to the children working in their family businesses in summers and holidays. Those kids would listen in to their parents speaking about the business and the challenges they face at a very early age, at home and in social gatherings with other family members and friends. Those friends, in many cases, are stakeholders or business associates themselves. Hence, a ‘sixth sense’ of sorts is developed within those kids. And when they go off to business school like many other heirs of a family business, the new acquired systematic business knowledge finds itself well with the already existing ‘sixth sense’.

And when it is time to work in the business, family members normally communicate with each other much easier than others would simply because of the long-standing relationship they have. This includes easily gaining access to each other as well as feeling more at ease, especially when it involves communication from down up the organizational chart. This ease of access and communication leads to quicker decision-making and faster response to business turbulences, making the family business ahead of the game when compared to its competitors. Especially when you consider that managers in non-family businesses answer to many more shareholders with diverse goals and strategies while the shareholders of family businesses are making the decision themselves. And in the case of large families where not all shareholders work, a more unified set of visions and expectations exists as well as trust in the management chosen, all in all maintaining the high speed of decision making.

The fact that different families are just different means that each family could have its own unique set of intangible assets and resources that could be translated into competitive advantage. Some stem from the family values set by the founder of the business while others find their roots in the family norms of what is considered acceptable behavior and what obligations and expectations family members have or could face. The real question poses itself here that how could a family business nurture and sustain such competitive advantage? The simple answer is awareness of such intangible resources. The long answer is tricky, for until now, researchers have failed to arrive at a clear theoretical framework to explain the effect of the family in the business with all its elements. And when you stop to think about it a little, you would realize that they might never actually arrive to it, simply because they will be dealing with a bundle of family specific, intangible assets and resources that cannot be imitated or codified. In other words, you cannot recreate this resource the family owns in another business because it cannot exist without the members of that family. Nor can you write it down in an operations manual because its nature is tacit and with varying limits.

This brings us back to awareness of the existence of such resources as well as the awareness of their importance. The family must encourage the sense of pride in the fact that their business is, in fact a family business. Continuously stating this and publicizing it enhances this pride and helps generate the goodwill discussed earlier in the article. Also, awareness of the value and importance of social links between family members and with stakeholders outside the business will persuade family members to work harder on sustaining good relations with each other as well as with the stakeholder community at large. In addition, the awareness that being ahead in knowledge transfer means being ahead of the competition should have families encouraging open and frequent communication between family members both within the business context and in a social context as well. The sustainability of which lies in the awareness of the root of this advantage, namely the ‘familyness’ of family firms.

Tharawat Magazine, Issue 2, 2009