Families have been a significant part of the establishment of successful businesses all over the world. In the United States, they cover almost 80% of the firms that are managing the industries playing a crucial role in providing employment and running the economy, which makes them an important area of research depend on the use of generations of a family for running the business. When the head of the management steps down, another generation of relatives is given the threshold of continuing the investment. The inheritance of business contradicts to non-family businesses which do not depend on blood relations but rather any individual with required skills that can efficiently run the company. However, according to recent studies, close to 70-80% of family businesses do not survive past the first five years (Westhead, 2006). Such a trend is alarming considering that similar businesses are continuing to grow. The family system faces several problems such as lack of coordination between relatives which causes disunity in the establishment. Family members have a significant role in ensuring that threats that are facing the company especially due to family relation within the management, is eliminated to ensure success. The internal problems facing these businesses include resource mobilization, centralized management, succession issues and close interaction.
Background and Issues underlying the research
The research will cover several areas and issues that affect family businesses and the reasons for their importance. One of the issues affecting family firms is one that faces resources mobilization within a company. Organizations heavily depend on the preparation and gathering of their resources to plan and implement company strategies. Strategies can include monetary funds, high potential employees and anything that the system depends on to run. The research will try to uncover how people being related affects a business through biased decisions, altruism, and nepotism. In regard to centralized management, family businesses mainly have a key individual such as the creator of the business or the one who inherited the establishment as the chief executive. The research will look at how such a system affects the company and can be detrimental to its success. It will show how the creator of the company has a bias in his or her decisions due to the attachment to the organization, and the manner by which it affects the individuals rule their subordinates. The research will also show the problematic process of succession and one generation stepping down to another. It will portray the issues that lie during entrepreneurial exits. People tend to be attached to the individual under whom they served, and the impact that has on their morale to work with new heads will be demonstrated. Family business also has a close sense of interaction due to the connection of the relatives. However, the research will be determined to portray the issues faced when people that are related run a business.
The paper will also provide ways and means of dealing with the issues effectively. It will show areas of work that have demonstrated strategies in which families can deal with the weakness in their business system.
Justification for the research
The threats that are investigated determine the success of family businesses. When one takes into consideration the decline that such kinds of companies experience, recognition of the problems plays a critical role. Resource mobilization determines the kind of service that the customers will receive. A business that has failed to ensure enough resources to provide sufficient service will not be able to be competitive in the market. The style of management heavily determines how employees and individuals will function and also influences the flow of decisions. A fixed style of command makes it difficult for a business to experiment ideas which over time can give the competitors the upper hand. The problems facing family firms that will be tackled, will give family businesses insight on how to avoid common pitfalls that have faced other similar establishments.
Business discipline and academic area(s) that relate to the research
One of the business discipline and theories that are involved in the research is the agency theory. It is concerned with the relationship between an individual that serves as the principal and the one that acts as an agent. In this research, the principal is the party who owns the business which is the family, and the agent will be the person working under a management contract for a period that is not a relative. It will demonstrate the friction and conflict between the two groups and how it serves as a threat.
Literature Review
Resource mobilization is recognized as a vital area in regards to the role that families play when running their business. According to Anderson, Jack and Dodd (2006), the families are expected to ensure requirements for a successful system within the organization such as recruitment and training of employees and building networks for the company. They have a significant role to make sure all that occurs, however, mobilization in a family-based environment is problematic. One of the issues is the fact that family control is seen as a fundamental entity (Blanco-Mazagatos, de Quevedo-Puente & Castrillo , 2007). Families develop the desire to make sure that their relations are the ones who are running the business and have the biggest share. According to Blanco-Mazagatos, de Quevedo-Puente and Castrillo, it makes them very choosy when acquiring financial resources from stakeholders. When external parties invest in the company which will increase the equity for the establishment, they will continue to gain a higher percentage of control over the company's decisions. Furthermore, it is stated that family businesses tend to favor their own during employment (Dyer, 2006). They will look towards people of their clan and ignore external pools of high potential employees due to nepotism. The sentiment is supported by Schulze, Lubatkin & Dino (2003), who mentions that family-based companies have a large sense of showing altruism to their own and acting out of nepotistic attitudes. Favor is given to relatives such as higher salaries and better company positions, sometimes disregarding their business experience or their leadership capabilities. However, regardless of the threats facing resource mobilization, various texts have demonstrated that the problem can alleviate. In fact, according to Habbershon and Williams (1999), the family identity is one that can be utilized to create a brand identity for a company. The essence of a family-oriented business, according to them, increases the commitment and attachment of an employee. People in relation running a company have the responsibility of dealing with the threat of mobilization by taking advantage of the fact that family business fosters entrepreneurship (Naldi, Nordqvist, Sjoberg and Wicklund, 2007). According to Naldi et al., such kinds of establishments are oriented to function for a long time, which creates to nurture new talent and sponsor innovation.
The agency theory plays an important role in demonstrating a weakness that faces family-oriented establishments. Jensen and Meckling (1976) explain the concept of agency cost, whereby managers of such companies tend to have a conflict with the owners who are related. The manager who is indebted to ensure the company runs in the most effective means possible can go against the desires of the family as they are inclined to serve their desires. Such a situation can create a form of antagonism which can create disputes and ultimately make the company go on a decline.
Family business faces an issue in regards to the method in which decisions are made in the company. Dyer (2006) believed that family-run companies, especially those that are first-generation, to be autocratic. It makes the style of decision making to be very rigid as the instructions come from the top without involving those that are below. Levinson (1971) explained that individuals that create the establishments tend to be very attached to them. They view them as their children or next of kin, making them be very protective of how they run. Levinson also believed that the founders of the companies see employees and individuals working for them as nothing more than tools to help the organization succeed. Due to this, the person in charge will be behind every important decision, disregarding the subordinates as they will view their perspective as the most fitting. Aronoff (1998) believed that a more inclusive style of management is the most successful for businesses. They should provide acceptance to other people's opinions, and instead of one person running everything, other family members should be given a voice in the opinion. Aronoff saw that blood relations should give space to non-related parties to participate in the management. Those that do tend to experience higher amounts of success than those that are only inclusive of relatives.
Further research of other works demonstrates a major problem during succession. Vassiliadis and Vassiliadis (2014) explain that several problems are seen when the business is passed from one generation to another. One of the problems they explain is that people who have built their businesses from the bottom tend to become attached to their work. Passing it on forward becomes difficult due to the close connection they have developed to it. They feel as if they are losing a core part of themselves. Levinson echoed a similar sentiment by explaining that people become emotional about what they have created and view them similar to a significant other or a spouse. Vassiliadis further explains that when handing down a company, the person has never experienced the complexity of the process. They do not understand how it works or its requirements as they have never been in a similar situation before. To avoid situations whereby the next generation has no experience of handling the newly handed business, Lambrecht (2005) states that the younger generation needs to be prepared and trained. They will learn about the company's culture and the manner by which it is run, eliminating the threat of inexperienced leadership after succession. Kellermans and Eddleston (2004), believe businesses that are family based face a lot of conflicts due to the close interaction between members. They believe that the disagreements can be due to very mundane reasons to personal problems between the relatives. However, the problem can be eliminated by learning how to keep a professional space at work and to foster an open platform where people share their issues so that they can be solved. Astrachan and McMillan (2003) provides another solution for members, is to make them remember the history of the family business. They need to be taken back to the roots of how the establishment started to make them attached to its cause.
Critical Analysis of Text
The article analysis is a journal "Risk Aversion in the Family Business: The Dark Side of Caution" by Hiebl (2014). The reason for using the work as the main basis of the critical analysis is due to the connection between its content and the research question. The research was based on finding the threats to family businesses and how the members can tackle them. The work under analysis fits into my investigation talks about one of the most prominent issues faced by family firms which is avoidance of risk. It explains the problems that it causes for the organization and how members can approach it. My purpose in analyzing it provides more insight to me on why risk aversion is such a significant threat for the family business, helps me understand what issues lie in the subject and how it can be eliminated. Hiebl's article is a research type of literature. It is because it uses other works done on the subject and utilizes them to dig deeper into finding more information on risk aversion. Furthermore, the content is based on a practical approach that can be applied by family-run organizations, making it have very little connection to theoretic literature. The intellectual project that is occurring is one that is knowledge-for-action. The project by Hielb is one that can be used be existing or growing family setups that can use the knowledge to push their establishments forward. The information is atheoretical and based on empirical data and actions that have been practiced rather than theorized notions. The target audience is relations based establishments, and the article takes account into this by providing easy to grasp policies and recommendations that can be put into action. The claims of the author are theoretical as the topic of risk aversion is one that has hardly experienced any research before. The author even admits that the content is one of the earliest to cover the topic, which has its limitations. The entire argument is well developed and portrayed. The abstract is stated and offers an excellent summary of the important points of the essay. The claims are based on other researcher's work and not the author's. They explore what acquired data and analysis of the work have been done. According to my experience, the recommendations provided to negate the problems of risk avoidance such as transparency and utility of external advice are very helpful. They are based on practical examples and are well demonstrated, making the claims to be very convincing.
Conclusion
Family businesses face various threats such those affecting resource mobilization, autocratic management, problems during entrepreneurial exits and close interaction. Without efficient handling of the issues, the challenges can hinder the company's success. However, the members can tackle the threats by including external participants that are non-family members, training and providing experience to the incoming generation and developing a professional and transparent platform of relations.
References
Anderson, A. R., Jack, S. L., Dodd, S. D.(2006). “The role of family members in entrepreneurial networks: Beyond the boundaries of the family firm.”, Family Business Review, vol.18, pp.135-155.
Aronoff, C. (1998). Megatrends in family business. Family Business Review, 11 (3), 181-185.
Astrachan, J. H. and McMillan, K. S.(2003). Conflict and communication in the family business. Marietta, GA: Family Enterprise.
Blanco-Mazagatos, V., de Quevedo-Puente, E., & Castrillo, L.A. (2007). The trade-off between financial resources and agency costs in the family business. Family Business Review, 20(3), 199-213.
Dyer, W.G. Jr. (2006). Examining the “family effect” on firm performance. Family Business Review, 19(4), 253 -273.
Habbershon, T.G. & Williams, M.L. (1999). A resource-based framework for assessing the strategic advantages of family firms. Family Business Review, 12(1), 1-25.
Hiebl, M. R (2014). Risk aversion in the family business: the dark side of caution. Journal of Business Strategy, 35(5), pp.38-42.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
Kellermans, F. W. and Eddleston, K. H. (2004). Feuding Families: When Conflict does a
FamilyFirm Good’, Entrepreneurship Theory and Practice, 28(1): 209–28.
Lambrecht, J. (2005). Multigenerational Transition in Family Businesses: A New Explanatory Model. Family Business Review, XVIII (4), 267 - 282
Levinson, H. (1971). Conflicts That Plague Family Businesses. [online] Harvard Business Review. Available at: https://hbr.org/1971/03/conflicts-that-plague-family-businesses [Accessed 13 Feb. 2018].
Naldi, L., Nordqvist, M., Sjöberg, K, and Wiklund, J. (2007). Entrepreneurial orientation, risk taking, and performance in family firms. Family Business Review, 20(1), 33-58.
Schulze,W. S., Lubatkin, M. H., & Dino, R. N. (2003). Toward a theory of agency and altruism in family firms. Journal of Business Venturing, 18(4), 473-491.
Vassiliadis, S. and Vassiliadis, A. (2014). The Greek Family Businesses and the Succession Problem. Procedia Economics and Finance, 9, pp.242-247.
Westhead, P. and Cowling, M. (2006): The Scale and Nature of Family Businesses: in Fletcher D: Understanding the Small Family Business, London: Routledge
