Family Business Typologies

The “family” element in family businesses is what makes them different from non-family businesses. It is this element which largely determines how the firm will perform; shaping its structure as well as the strategic position the firm will take.

Furthermore, family businesses are unique in that the pattern of ownership, governance, management and succession affects the firm’s goals, strategies, structure and the manner in which each is formulated, designed and implemented (Chua et al, 1999). Therefore, the family element shapes the business in a way that the family members of executives in non-family businesses do not and cannot (Lansberg, 1983). The realization of the uniqueness of family firms’ behavior and development has resulted in the vast amount of literature in this field. Yet there are differing views on what elements define a firm as a family business, which has led to the increased development of family business typologies. There is a general consensus that family firms cannot be viewed as a homogeneous entity and that due to differing factors, including family background and industry characteristics, each family firm is developed in a unique manner (Chrisman et al., 2005; Westhead and

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Howorth, 2007; Sharma et al., 1997). The family element must be seen as an influence which places the firm along a continuum, differing in a number of dimensions regarding the interaction between family and business (Astrachan et al., 2002).

Although studies use differing bases of differentiation, the three most prevailing dimensions are ownership, management and the relationship or involvement of family members in the business. One of the earliest studies in family firm typologies is that by Dyer (1988). Using nature of relationships, human nature, nature of truth, the environment, universalism/particularism, nature of human activity and time as basis of differentiation, Dyer (1988) classified four different types of family firm cultures: paternalistic, laissez-faire, participative and professional culture. Each type of culture has different cultural patterns on the seven dimensions. The paternalistic culture is characterized by hierarchical relationships where leaders, who are family members, retain all power and authority and make all the key decisions (Dyer, 1986). Family members distrust outsiders and employees are assumed to carry out tasks without any questioning. Firms with a paternalistic culture may be oriented in the past, where the goal of the firm is to carry out the founder’s and the family’s legacy. The laissez-faire culture, although similar to the paternalistic culture in that relationships are hierarchical and family members are given preferential treatment, trust employees and are given the freedom to make decisions (Dyer, 1986). The participative culture is characterized by a more egalitarian and group oriented pattern of relationships. Employees are trustworthy and are given the opportunity to magnify their talents. Personal growth and development are encouraged while the status and power of the family is

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de-emphasized (Dyer, 1986). Lastly, with the professional culture, family firms turn the management of the business to non-family, professional managers. This leads to an individualistic relationship pattern, where employees focus on individual achievement and career advancement. Efficiency is emphasized and professional managers take an impersonal, neutral stance when evaluating the performance of employees (Dyer, 1986).

In 1997, Gersick et al, in the book Generation to generation: Life cycles of the family business, developed one of the most widely accepted frameworks for the study of family firms. Using the dimensions of ownership, family and business developmental stages, the authors developed a three-dimensional framework. It proposes that a family firm is a system composed of three independent but overlapping subsystems: business, ownership and family. Four types of family firms:

controlling owner, sibling partnership, cousin consortium and passing the baton stem as a result of the interaction between the three different subsystems (Koulouvari, 2004). The controlling owner firm is characterized by leadership under one individual or a married couple. The sibling partnership is managed by two or more individuals in the second generation of the family. Under the cousin consortium, ownership is shared between extended family members in different generations. Lastly, passing the baton involves the first generation officially passing the business to later generations and retiring from the family business. This typology is then expanded into the developmental stages of family and business. A comprehensive description of this framework will be given later in this study.

Taking sole consideration of family involvement in the business, Birley et al

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(2001) proposed that family firms can be classified into family in, family out and the juggler. Family in firms take family needs and concerns into account, thus greatly influencing firm behavior. On the other hand, Family out firms have little family involvement, thus family issues are generally not considered when making decisions. Lastly, juggler firms are those that attempt to maintain a balance between the needs of the families with the needs of the firm (Dyer, 2006).

On 2002, using Gersick et al’s (1997) three-dimensional model, Sharma developed a stakeholder-mapping technique. By placing each individual stakeholder of the firm in their respective places on the three-dimensional model, a visual representation of the position of all internal stakeholders in a family firm at a given time is created. This stakeholder map enables an understanding of the roles, perspectives, needs and concerns of a firm’s internal stakeholders (Sharma, 2002).

Through this stakeholder mapping technique, Sharma (2002) categorizes 72 distinct categories based on the number of family and non-family members involved in the firm’s ownership and management. Through these categories, propositions regarding useful governance mechanisms for different types of high performing family firms were then given (Sharma, 2002).

As an extension of the study on 2002, on 2004, Sharma further looked into the factors of performance on the family and business dimensions, which in turn led to the classification of four types of family firms: warm hearts-deep pockets, pained hearts-deep pockets, warm hearts-empty pockets and pained hearts-empty pockets.

A warm hearts-deep pockets firm is the most ideal, where it enjoys high emotional (favorable familial relationships) and financial capital. Pained hearts-deep pockets

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firms enjoy stable financial capital but are tension prone or exhibit failed family relationships, which might result in bad business decisions and eventually affect the firm’s performance over time. Warm hearts-empty pockets firms enjoy strong relationship with family members, but the business does not perform as well. Lastly, pained hearts-empty pockets firms perform poorly on both the family and business dimension (Sharma, 2004). Arguing against Jensen and Meckling’s (1976) agency cost theory, Lubatkin et al (2005) analyzed the ownership factor which led to three categories of family firms which are similar to those in Gersick et al’s (1997) findings: controlling owner, sibling partnership and cousin consortium.

In 2006, Dyer led a study taking into consideration completely different bases of differentiation. He incorporated the resource-based view with the agency cost theory.

In this study, Dyer (2006) examines the “family effect” on firm performance in which opposing views of the effect that agency costs have on a family firm’s development are discussed. While some research supports that family firms fare better than non-family firms due to reduced agency costs (Etzioni, 1961; Fama &

Jensen, 1983b; McConaughy et al, 1998; McConaughy, 2000; Gomez-Mejia et al, 2003; Ensley & Pearson, 2005) others take on the alternative perspective that agency costs in family firms may be even more due to factors such as shirking, exorbitant compensation or accumulating perquisites (Schulze, Lubatkin & Dino, 2003). Altruism, treating people for who they are rather than what they do, which is often seen as the cornerstone value in family firms is also deemed as a factor that increases agency costs (Schulze, Lubatkin, Dino & Buchholtz, 2001). Dyer (2006) examines another popular approach used in determining the performance of family firms: the resource-based view (Habbershon & Williams, 1999; Sirmon & Hitt,

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2003). According to Barney (1991) and Penrose (1959), the resource-based view suggests that firms with assets that are valuable, rare, inimitable and non-substitutable may be able to create a sustainable competitive advantage (Dyer, 2006). Three types of capital (or assets) are identified: (1) human capital, (2) social capital and (3) physical/financial capital (Dyer, 2006). As the agency cost theory, the resource-based view has also received mixed opinions concerning the effects it has on family firms. The extent of the agency cost and the degree to which the three different assets become liabilities are placed on two axes. From these, four categories of family firms are developed: clan, professional, mom & pop and self-interested family firms. The clan family firm, the most ideal, has low agency costs coupled with high family assets. The professional family firm incurs high agency costs but has high family assets. The mom & pop family firm in turn, has low agency costs but high family liabilities. Lastly, the most undesirable category is the self-interested family firm which has high agency costs as well as high family liabilities (Dyer, 2006).

More recent developments on family firm typologies return to the dimensions of ownership and management. By observing these two dimensions, Westhead &

Howorth (2007) conceptualized six types of family firms which were empirically tested using data on UK family firms with the agglomerative hierarchical QUICK CUSTER analysis. These six family firm categories were: average, professional, cousin consortium, professional cousin consortium, transitional and open family firm. Average family firms focus on family objectives and have closely-held family ownership and family management. In the professional family firm, there is a mix of family and non-family employees with a focus on family objectives. Cousin

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consortium family firms hold both family and non-family objectives. Professional cousin consortium family firms focus more on financial objectives and ownership is delegated within the family while management rests mostly on non-family members.

A major difference with transitional family firms is that they have diluted ownership outside the family but family members dominate management. Lastly, open family firms are financially-driven, have diluted ownership outside the family and non-family management is dominant (Westhead & Howorth, 2007).

In a most recent study, Dekker et al (2010) developed a new typology of family firms. In this research, they proposed that family firms lie in two continuum, professionalization and formalization. Based on past literature, professionalization is defined as a process which coincides with hiring external non-family managers, establishing governance structures such as boards and councils, a delegation of control, a more official structure with dispersed responsibility and clear, non-overlapping role descriptions and higher internal specialization (Dekker et al., 2010). On the other hand, formalization is described as a movement from informal controls to a more formal setting with strategic planning, high quality formal training programs, explicit organization strategy, formal recruiting programs and formal control systems like output controls, behavior controls, monitoring controls, incentive systems, budget standards and management reports. Based on their studies, Dekker et al (2010) developed a new typology which categorizes family firms in each of the four groups: Autocracy, Domestic Configuration, Clench Hybrid and Administrative Hybrid. These four categories are mutually exclusive and jointly exhaustive and family firms have the ability to shift between these four groups, depending on their movement on one or both axes. Autocracy family firms are

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characterized by informal decision making and rely heavily on shared values and norms, kinship ties, common interest and vision, rituals and ceremonies. In this type of firms, the main objective is self-reliance and family maintenance (Dekker et al, 2010). Moving towards more formalization, the domestic configuration firm type is still owned and managed by the family; however, budget plans, strategic planning systems and monitoring systems exist to make sure managers act in correspondence to organization goals (Dekker et al, 2010). In the clench hybrid firm, family and non-family employees co-exist, although much of the control systems still remain informal. Lastly, the administrative hybrid firm is highly professional and formalized, adopting formal control systems and other formalization features.

Through a review of the extant literature on family firm typologies, one can see that most of the factors analyzed concern the family member’s role of ownership and management in the business and the degree of influence that the “family”

element has on the firm’s strategic position as a whole. Gersick et al’s (1997) three-dimensional development model best captures the dimensions proposed by most researchers. It is a well accepted classification serving as a common basis for studying family firm development (Koulouvari, 2004). Therefore, this study will adopt the three-dimensional development framework to analyze the challenges the case study company has encountered since its foundation and the challenges it is yet to face. A comprehensive description of what this model entails will be given in the following section.

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