Entrepreneurship in Family and Non-Family Firms

Yet, over time some family firms become conservative, unwilling or unable to take the risks associated with entrepreneurship (Autio & Mustakallio, 2003; Dertouzos, Lester, & Solow, 1989). Founders of family firms, who desire to build a lasting legacy, may become more conservative in their decisions because of the high risk of failure of entrepreneurial ventures (Morris, 1998), as well as the risk of destruction of family wealth (Sharma, Chrisman, & Chua, 1997). Family firms may also choose conservative strategies as a result of their organizational cultures (Dertouzos et al., 1989), defined as the enduring values that shape the firms’ characters and how they adapt to the external environment.

These cultures embody the beliefs, aspirations, histories, and self-concepts that are likely to influence firms’ disposition to support and undertake entrepreneurial activities. Family firms’ cultures develop over time reflecting the dynamic interplay between owners’ values, organizational history and accomplishments, the competitive conditions of the firm’s major industry, and national cultures (e.g., Corbetta & Montemerlo, 1999; Pistrui et al., 2000). These cultures also reflect the ethnic heritage of the family that owns and runs the firm (Pistrui et al., 2001). A society’s regional cultures and historical experiences also shape these cultures (Davis, Pitts, & Cormier, 2000; Ward, 2000). In addition, these organizational cultures reflect a wide range of political, ideological, sociological, experiential, economic, and psychological factors (Pistrui et al., 2000). In the context of family firms, scholars have observed that national and regional cultures exert a unique influence on key family business processes such as succession (e.g., Howorth & Ali, 2001; Sharma & Rao, 2000). The multiplicity of the variables that influence these family business cultures makes them distinct and difficult to imitate. While the literature on family firms and their cultures is evolving worldwide, little empirical research has investigated the specific links between these firms’ cultures and entrepreneurship, an issue this study explores.

This article empirically examines the relationship between family firms’ cultures and entrepreneurship. It proposes that family firms’ cultures are an important strategic resource (Barney, 1986) that can give these firms a distinct advantage over their rivals by promoting and sustaining entrepreneurial activities. Using the resource-based view (RBV) of the firm (Barney, 1991; Priem & Butler, 2001), this article advances specific hypotheses about the links between the multiple dimensions of culture in family firms and entrepreneurship. The study then empirically tests these relationships, by comparing the influence of dimensions of culture on entrepreneurship in family and non-family firms, using data from U.S. manufacturing companies.

This article makes two contributions to the literature. First, it highlights the importance of organizational culture for value creation in family businesses. Given that entrepreneurship is important for value creation (Zahra, Neubaum, & Huse, 2000), and the important role family firms play in creating new ventures (Astrachan & Shanker, 2003), linking organizational culture to entrepreneurship provides an important test of RBV propositions. Second, with some exceptions (e.g., Hall, Melin, & Nordqvist, 2001) few studies of organizational culture have focused on family firms (Dyer, 1986). Also, prior studies of organizational culture have failed to distinguish family from non-family firms.

Given the potential differences between family and non-family firms (Sharma et al., 1997), it is important to empirically delineate which dimensions of organizational culture are conducive to entrepreneurship within family firms. We achieve this by comparing the influence of dimensions of culture on entrepreneurship in family and non-family firms. The remainder of the article presents a theoretical rationale for the influence of culture on entrepreneurship in family firms and an empirical examination of this relationship.

The Importance of Organizational Culture in Family Firms

Organizational culture refers to the coherent pattern of beliefs and values that represent acceptable solutions to major organizational problems (e.g., Dyer, 1986; Schein, 1992). According to the RBV, organizational culture can be a strategic resource that generates a sustainable competitive advantage (Barney, 1986) by promoting learning, risk taking, and innovation (e.g., De Long & Fahey, 2000). Family firm cultures are also difficult for rivals to imitate (Dierickx & Cool, 1989) because of the ambiguity about their origins and their embeddedness in family history and dynamics (Gersick et al., 1997). There are also substantial diseconomies resulting from time compression, because culture cannot quickly be developed or changed. Organizational culture is a tightly connected system of artifacts, espoused values, and underlying assumptions. The interconnectedness of family firms’ intangible and tangible assets also inhibits the imitation of their cultures. Several characteristics unique to family businesses increase the significance of organizational culture as a strategic resource (Rogoff & Heck, 2003). As noted, owners and managers are often one and the same, mitigating the problem of alignment of goals of principal and agent (Daily & Dollinger, 1991). This alleviates concerns about opportunistic behavior by agents (Chrisman, Chua, & Litz, 2002; Schulze et al., 2001) reducing the need for contractual controls and monitoring, and increasing reliance on social controls such as trust (Steier, 2001). Reduced reliance on formal controls and coordination increases the importance of a firm’s culture as a key determinant of its behaviors.

Dimensions of Culture that Support Family Business Entrepreneurship

While there are numerous dimensions of organizational culture (Detert et al., 2000), building on the literature (e.g., Chua, Chrisman, & Sharma, 1999), this study examines four dimensions that are expected to be associated with entrepreneurship in family firms: individual versus group orientation; an internal versus an external orientation; assumptions concerning the centralization/decentralization of coordination and control; and short- versus long-term orientation. The potential advantage is realized when these dimensions of culture encourage the firm to be more proactive, innovative, and riskoriented (Miller, 1983; Zahra et al., 2000).

Individual vs. Group Cultural Orientation.

This dimension refers to the value placed upon individual versus group contributions in family firms (Detert et al., 2000). Since the degree of individualism versus group orientation will influence innovation and risk taking (Herbig, 1994), RBV scholars view this as a potential source of sustainable competitive advantage (Barney, 1986; 1991). A group cultural orientation stresses cooperation and collaboration in the firm’s decision-making processes. Group-oriented family business cultures explicitly reward individuals when they share knowledge, cooperate and collaborate (DeLong & Fahey, 2000). In these cultures, the belief is that only through joint effort can the best solutions be identified and tested. The resulting trust and sharing of sensitive data and innovative ideas across functional boundaries encourages entrepreneurship (Burgelman, 1983). This is likely to be the case in family firms where kinship relationships bind members of the firm. Thus, we expect that a group orientation has several positive benefits for entrepreneurship in family businesses. In individual-oriented organizational cultures, opportunities, and rewards result from demonstrations of individual excellence, and this may discourage organizational members from collaborating and sharing new knowledge or information. However, entrepreneurship requires risk-taking, autonomy, individual empowerment, and personal commitment (Lumpkin & Dess, 1996). The autonomous activities of organizational members are conducive to the initiation of entrepreneurial projects (Burgelman, 1983). While a cultural orientation of individualism facilitates the recognition of radical innovation by individual entrepreneurs, a group cultural orientation encourages entrepreneurship (Herbig, 1994). Therefore, these two opposing forces should be somewhat balanced for entrepreneurship to flourish. One cross-cultural study found that moderate levels of individualism were most strongly associated with entrepreneurship (Morris et al., 1993). Therefore:

Hypothesis 1: There will be a curvilinear relationship between the organizational cultural dimension of individual-versus-group orientation and entrepreneurship in family firms. Moderate levels of individualism will be associated with the highest levels of entrepreneurship.

Internal versus External Cultural Orientation. This dimension refers to the dominant beliefs within the family firm about its relationship to the external environment. An internal cultural orientation emphasizes the development of knowledge and expertise that resides within the firm’s boundaries. In this culture, entrepreneurship results from the intellectual capital within the organization (Detert et al., 2000). Over time, however, an internal orientation may evolve into inertia that stifles entrepreneurship. An inward orientation might inhibit a family firm’s ability to explore the innovative methods and practices introduced by its rivals, thus lowering its entrepreneurial activities. Concern about the dysfunctional effects of an inward organizational culture is magnified by the fact that the founder or founding family might dominate an organization for years, controlling the decision-making process and limiting its exploration of innovative ideas.

Externally focused cultures place greater value on signals from their external environment, studying market trends that provide important insights into emerging entrepreneurial opportunities. Customers, competitors, suppliers, and markets are also viewed as important sources of information to be used in the identification of organizational problems and in developing innovative solutions for them. Von Hippel, Thomke, and Sonnack (1999) describe how organizations leverage their customers’ unique knowledge to develop breakthrough product and service innovations, which are key to entrepreneurship.

Therefore, following the RBV, an inward culture can place the family firm at a disadvantage because it does not develop the capabilities necessary to promote entrepreneurship. In contrast, an externally focused organizational culture is expected to dedicate greater resources to develop the capabilities that allow family firms to acquire knowledge from a variety of external sources and thus increase their entrepreneurial activities (Kanter, 1983). Therefore:

Hypothesis 2: High external cultural orientation is positively associated with entrepreneurship in family firms.

Assumptions Concerning Coordination and Control. A third dimension of organizational culture is the firm’s beliefs regarding coordination and control. These beliefs form a continuum ranging from total decentralization to complete centralization of decision making authority. Centralization places power in the hands of a few select people and may stifle entrepreneurship by inducing rigidity within the family firm’s structure. Centralization may also limit the exchange of entrepreneurial ideas that will make it difficult for employees to gain the support needed for their ventures. In contrast, organizational cultures that accept and encourage legitimate, decentralized authority and coordination of effort will enhance flexibility and promote the independent contributions of their members (e.g., Kanter, 1983). Decentralization enables employees to take initiative and propose new entrepreneurial ideas (Miller, 1983; Pinchot, 1985). Therefore:

Hypothesis 3: A cultural orientation toward decentralization will be positively associated with higher entrepreneurship in family firms.

Short- vs. Long-Term Time Orientation. A final dimension of a family firm’s culture is their orientation toward time (Deal & Kennedy, 1983). This orientation refers to the family firm’s disposition toward long-term value creating activities that have a low probability of success, but are important for new business creation and revenue generation.

Some family firms are short-term oriented and support only those projects with an immediate high potential payback. These firms’ owners may be unwilling to risk their wealth or put the future of their firms at risk. Family members might also worry about the loss of their inheritance, pressuring managers and employees to downplay long-term value creating activities. However, other family firms may emphasize their commitment to long-term value creating activities such as entrepreneurship. Following the RBV, these cultures can be an important resource that increases their entrepreneurial activities. The time orientation of a firm’s culture is reflected in its choice of control system. When organizations have a short-term orientation, they are likely to favor financial, rather than strategic controls. Financial controls are based on established goals, targets and performance quotas. Success or failure, therefore, depends on how managers and employees meet pre-established parameters. Financial controls reinforce a short-term orientation (Zahra, 1996), which reduces employees’ willingness to assume the risks associated with entrepreneurship. In contrast, strategic controls reflect a long-term orientation and require an understanding of the task at hand, the risks involved, and the potential tradeoffs among the choices managers might make. Understanding the risks and tradeoffs is important because entrepreneurial activities are chaotic and often unpredictable (Kanter, 1983). Cultures that favor patient investments in long-term but risky activities are more likely to support entrepreneurship (Hitt et al., 1996). A study of Fortune 500 companies found that strategic controls are positively associated with higher levels of entrepreneurship (Zahra, 1996). Therefore:

Hypothesis 4: Emphasis on financial controls is negatively associated with family firms’ entrepreneurship.

Hypothesis 5: Strategic controls are positively associated with family firms’ entrepreneurship

Organizational Culture and Entrepreneurship in Family vs. Non-Family Firms

Some researchers suggest that the unique interactions between the family subsystem, the business subsystem, and the individual organizational members, generate a bundle of unique resources and capabilities (Chua et al., 1999; Olson et al., 2003). The outcome of these interactions has been referred to as familiness (Habbershon et al., 2003), a variable that can differentiate the firm, resulting in a competitive advantage, as suggested by the RBV. In their study of Swedish family firms, Hall et al. (2001) found that family business cultures are an important influence on an organization’s ability to adopt radical changes. Pistrui et al. (2000) identify how individual, organizational, and cultural characteristics in East and West German family firms interact to influence entrepreneurial orientation.

Familiness emerges from the interaction of the family subsystem with the assets and capabilities that family firms possess. An important feature of family firms is that there is less concern over opportunistic behavior by agents (Chrisman et al., 2002; Schulze et al., 2001). A consequence of this is an increased salience of organizational culture for influencing the behavior of organizational members. Therefore, in family firms, cultural dimensions that facilitate rapid and effective responses to environmental change and new opportunities will have a greater effect on entrepreneurial activities than in non-family firms. Thus, the associations between the four dimensions of culture outlined above, and entrepreneurship, will be stronger for family than for non-family firms. This suggests the following hypothesis:

Hypothesis 6: The association between the four cultural dimensions and entrepreneurship will be stronger for family firms than non-family firms.

Discussion

Organizational culture is an important strategic resource that family firms can use to achieve a competitive advantage by promoting entrepreneurship and enhance the distinctiveness of these firms’ products, goods, and services. Entrepreneurship also enables family firms to obtain a competitive edge over their rivals by reducing the cost of operations, making these companies one of the most efficient organizational forms. Applying the RBV, the results show that four dimensions of a family firm’s culture significantly influence their entrepreneurial activities and have a more powerful influence than for the non-family firms studied here.

The results show that family firms’ individual-versus-group orientation has an inverted U-shaped relationship with entrepreneurship, as predicted in hypothesis 1. Family firms whose cultures strongly favor an individual orientation may find it easy to spur the entrepreneurial initiatives resulting from the autonomous action of their managers and employees. However, these firms may find it difficult to build the cooperation necessary to implement these activities (Pinchot, 1985). Entrepreneurship flourishes at moderate levels of individualism (Morris et al., 1993) and family businesses may benefit from balancing these two opposite cultural orientations.

Consistent with hypothesis 2, external orientation in a family firm’s culture emerges as a strong and significant antecedent of entrepreneurship which exposes the firm and its employees to diverse sources of knowledge, improving its ability to identify opportunities for entrepreneurship. Entrepreneurship in family firms is supported by a culture that values new knowledge acquired from customers, suppliers and competitors (Morris, 1998). This is especially salient for family firms because founders may hold the same position for years, increasing the likelihood of an inward focus in the organizational culture (Westhead & Cowling, 1996).

A cultural orientation toward decentralization of control and coordination is also positively associated with entrepreneurship, supporting hypothesis 3. Looser, decentralized organizations, in which autonomy and coordination through mutual adjustment is viewed as legitimate, will be more sensitive and responsive to changing conditions (Kanter, 1983). This is important because some family firms centralize their operations, a factor that can undermine their pursuit of entrepreneurial activities (e.g., Hall et al., 2001).

The orientation of a family firm’s culture toward time shows a strong association with its entrepreneurial activities. The time-orientation of family businesses is usually reflected in their choice of control system. A short-term focus is reflected in a preference for financial controls. Conversely, a preference for strategic controls reflects a long-term orientation. The results show that financial controls, a proxy for short-term orientation, lower entrepreneurship. These results support hypothesis 4. The results of this study provide evidence of a positive association between strategic controls and entrepreneurship, indicating the importance of a long-term cultural orientation. This finding is consistent with hypothesis 5 and recent studies that did not specifically explore family firms (e.g., Zahra et al., 2000).

Finally, the results of this study provide support for the view that the influence of culture on entrepreneurship will be greater in family than in non-family firms. Consistent with hypothesis 6, the two groups of firms differed significantly in the effect of organizational culture on entrepreneurship in four of the five variables examined. These results highlight the importance of the concept of familiness (Habbershon et al., 2003), especially in promoting entrepreneurship. The results reinforce the frequent observation, seldom supported by empirical evidence, that the intermingling of the family and the business may generate competitive advantages for family firms (Gersick et al., 1997).

Limitations

The results discussed above must be interpreted with caution. Even though the sample is representative of its target population, it does not cover all manufacturing industries in the United States and the results may not apply to all sectors of the economy. Also, given that family business values, operations, and organizational cultures vary significantly across countries (Davis et al., 2000; Owen & Rowe, 1995; Pistrui et al., 2000; Sharma & Rao, 2000), our results may not apply to cultural settings that differ radically from the United States. The study has also examined the relationships between four dimensions of culture and entrepreneurship, possibly overlooking other dimensions. Furthermore, the sample came from a single geographic region in the United States and this might limit its generalizability to other regions. While the use of a mail survey is a legitimate research approach, it may not adequately capture the subtle features of organizational cultures. Therefore, future research should replicate these results using alternative approaches to the measurement of the central constructs. Ethnographic methods, in particular, may be useful in this regard. Finally, the study explores the impact of a family firm’s culture on entrepreneurship, without explicitly distinguishing between those cultural factors related to family dynamics from those that develop naturally in these firms’ operations (Olson et al., 2003). Given that family subsystems vary considerably within and across cultures (e.g., Hall et al., 2001; Sharma & Rao, 2000), the effect of organizational culture on entrepreneurship may be more complex than uncovered in the current study. Despite these limitations, the results make several contributions to the field.

Contributions to the Literature

This empirical study provides a test of RBV propositions by examining the relationship between the culture of family firms and entrepreneurship. The evidence is supportive of the proposition that such intangible strategic resources promote long-term value creation through innovative entrepreneurial activities. The study’s second empirical contribution lies in investigating the relationships between specific dimensions of culture in family firms and entrepreneurship. Despite the popularity of discussions of organizational culture in the literature, few studies have examined the relationship between specific dimensions of culture and organizational outcomes such as entrepreneurship. The study offers an initial effort in this regard, laying a foundation for a more thorough examination of these complex issues in future studies. In a broad sense, the study advances research on the dynamics of family firms, an area that requires further analysis (Gomez- Mejia, Nuñez-Nickel, & Gutierrez, 2001; Schulze et al., 2001). Third, the study offers some preliminary results on the effect of organizational cultures and entrepreneurship in family vs. non-family business firms, filling a gap in the literature.

Managerial Implications

One of the study’s key findings is that cultural variables and organizational mechanisms that are shaped by dimensions of organizational culture have a strong and significant impact on family firms’ entrepreneurial activities. Family firm managers should identify, understand, and use organizational values that foster entrepreneurship. This will require a cultural audit to identify salient organizational cultural values. Managers need also to establish systems and structures that give employees the opportunity to contribute to entrepreneurship while providing the mechanisms necessary to coordinate and integrate these efforts.

The results also highlight the importance of reaching a balance between encouraging individual initiative (e.g., rewarding individual achievements) and fostering group collaboration (e.g., through creating job domains with overlapping responsibilities). This can be achieved by reducing unnecessary bureaucracy, valuing consensus in making key strategic decisions and supporting information sharing across functions and business areas. Managers need to foster an external orientation to promote the acquisition of new knowledge and the identification of new opportunities. This requires scanning the external environment to identify changes and opportunities.

Organizational mechanisms, including the use of family charters, family meetings, and councils, may also play a crucial role in fostering the distinctive familiness that promotes entrepreneurship. Family meetings offer an opportunity to strengthen and share the basic cultural values among family members active in the business (Corbetta, 1995). They also provide a forum in which shared collective cognitions are created. These cognitions guide collective actions (Habbershon & Astrachan, 1997) that enhance distinctive familiness.

Future Research Directions

The results suggest several avenues for further research. Apromising research avenue is to document how organizational culture affects entrepreneurship in different national cultural settings (Hayton, George, & Zahra, 2002). As previously noted, both family and company cultures often have unique characteristics in different countries. National cultures might moderate the relationships observed in this study between family firm attributes and entrepreneurship. Some national cultures encourage risk taking, whereas others reduce managers’ willingness to pursue entrepreneurial activities.

We have previously noted the significance of family business subsystems, which refers to the dynamic but complex interplay between business, family, and national and regional cultural variables (Pistrui et al., 2000; Sharma & Rao, 2000). Future researchers should empirically identify these subsystems and then relate them to entrepreneurship in family firms.

Little is known about how culture evolves in family firms throughout the different stages of their life cycles, and how such evolution affects these companies’ ability to nurture entrepreneurship. As family firms evolve across generations, their risk-taking preferences shift (Autio & Mustakallio, 2003). Future research should explore cultural differences across life cycle stages (Gersick et al., 1997), and the role these differences play in influencing family firms’ entrepreneurship. There is also a need to investigate the role of other dimensions of culture on entrepreneurship. Family firms’ assumptions about rationality in decision-making, the centrality of work and beliefs about human motivation deserve attention (e.g., Hofstede, 1991; Schein, 1992). Researchers need also to document how these assumptions, beliefs and values influence employee attitudes and performance and, as a result, entrepreneurship (Rogoff & Heck, 2003).

Future research should also identify key moderators of the relationship between organizational cultures and entrepreneurship. The extent to which the founder or other influential family members are central to the family firm’s operations may enhance or hinder the impact of different dimensions of culture on entrepreneurship. Similarly, the number of family members who are active in the business, or the number of generations, may influence the direction, strength, and significance of these relationships (Winter et al., 1998). The unique nature of social networks within family firms may influence opportunity recognition (Barney et al., 2003), which suggests a need to understand the extent to which different forms of family network ties might moderate culture’s influence on entrepreneurship (and vice versa).

The differences found between family and non-family firms in the influence of organizational culture on entrepreneurship suggest a further need to contrast these two groups of firms. How do their cultures develop? Do these firms benefit from different sets of organizational cultural variables? Are the relationships found in this study stable over time? Clearly, these and similar issues warrant further investigation.

Conclusion

Entrepreneurship is an important way in which family businesses create value. Given that family businesses are typically characterized by an emphasis on social control and the centrality of their founder, organizational cultures may be of even greater strategic significance than for non-family firms. This study shows the strategic importance of organizational culture for family businesses, by presenting evidence of the relationship between four key cultural dimensions and entrepreneurship. These differences are significantly stronger in family firms than in non-family businesses.