Family Business Research: Reviews

Introduction

Family firms are said to be the originating form of any business activity (Wakefield, 1995), dominating the economic landscape of most major economies in the world (Shanker et al., 1996; Klein, 2000; Heck et al., 2001; Morck et al., 2003; IFERA, 2003; Astrachan et al., 2003). Two thirds of all enterprises worldwide are said to be family-owned and/or managed (Gersick et al., 1997). In Germany, between 60% and 90% of all firms can be considered as family firms (Terberger, 1998). The life span of family firms is however often relatively short, as only a limited number survives the transition to the second generation, and hardly one-third even into the third (Beckhard et al., 1983; Neubauer et al., 1998; Shanker et al., 1996; Paisner, 1999).

Due to this high importance of family firms, academia has finally recently begun to recognize their necessity as a research object (Chrisman et al., 2006). According to Dyer Jr., 2003, the field of management studies has paid insufficient attention the family firms’ unique theoretical and practical problems so far. The interest in family firm research has accordingly grown significantly increased in the recent years, leading to a distinctive legitimate and emerging field of study in business research. The underlying supposition therein is the question whether family firms do really behave differently from non-family firms, and if so, how and why they are different. Several researchers suggest that the family-form of organization holds essential advantages (Anderson et al., 2003; McConaughy et al., 1998). Nevertheless, despite the progress made especially in the last decade, research on family firms remains a new field which trying to gain legitimacy within management studies (Hoy, 2003), although much remains to be done, as Chrisman et al., 2003b state.

This article attempts to summarize and structure current research on family firms by seeking out and the findings and themes from that literature of likely interest to business school scholars. Therefore, an analysis of the 120 most important articles on family firm research from the last two decades is applied.

Definitions and theoretical foundation

Defining family firms

The justification for the emergence of the field of family firm research lays in the assumption that family and non-family firms are different. Recent empirical studies, such as one amongst S&P 500 firms (Anderson et al., 2003) show that firms being under the influence of the founding families outperform their counterparts. Especially in terms of performance (such as size, growth, profitability etc), significant differences between family and non-family firms could be identified (Gallo, 1995; McConaughy et al., 1999; Westhead et al., 1998). Nevertheless, there is no universal definition of what a “family firm” is yet. Westhead et al., 1998 have reviewed and analysed existing definitions of family firms that have been used in previous research. It seems that the problem is less differentiating between a firm that is clearly a family firm and one that is clearly not; the problem is rather the “grey area” in between. The authors found for example that the ratio of family firms varies dramatically depending on the definition used in the study. Accordingly, there are numerous definitions of what a family firm is out there.

For instance, researchers define a family firm operationally by the components of a family’s involvement in the business: ownership, management, or business succession (Chrisman et al., 2003b). Regrettably, they have enormous problems in making a precise definition. Definitions reach from one hundred percent ownership over the majority of shares until the majority of control (Chua et al., 1999), or they deal with the question whether governance by the family is enough or management of the firm would be necessary. Some studies even consider a company a family firm when the firm considers itself to be one (Westhead et al., 1998).1 Shanker et al., 1996 differentiate between a narrow and a broad definition of family firms – where in the former, the family is involved in the daily business, whereas in the latter, the family only sets the strategic

direction for the firm. Accordingly, researchers have proposed a broad variety of combinations of the named components. When different definitions are applied, the percentage of family business in one sample can vary from 15% to 80% (Westhead et al., 1997).

On the empirical side, e.g. Astrachan et al., 2002 have developed a scale for assessing the extent of family influence on a business organization, using the dimensions power, experience, and culture. Klein et al., 2005 measure the family influence on power, experience, and culture within a firm, developing their so-called “F-PEC scale”. Family firm research has so far about 4 different streams on the individual level.

The resource-based view as theoretical foundation for family firm research

The resource-based view (RBV) of the firm argues that firms are able to outperform others if they can develop valuable resources or capabilities which cannot be easily imitated or substituted by its competitors (Barney, 1991; Teece et al., 1997). In that respect, one of the major considerations in family firm research is the question whether is whether family involvement can lead to a competitive advantage. Accordingly, several scholars suggest that the connection between family and business may lead to unique advantages in the acquisition of resources (Haynes et al., 1999; Aldrich et al., 2003; Stewart, 2003). The RBV can contribute to investigating how family firms identify and develop distinct unique capabilities, and how those might be transferred (e.g. during business succession) to new owners and structures (Habbershon et al., 1999). Barney et al., 2002 suggest that family ties may provide an advantage in opportunity identification due to a higher willingness to share information with each other between members of the same family.

Entrepreneurship and family firm research

As Aldrich et al., 2003 state, “‘very little attention has been paid to how family dynamics affect entrepreneurial processes” (p.574). It seems surprising that there is a need to signal the theoretical link between entrepreneurship and family business research, since there are various relationships between these two areas (Fletcher, 2005). Firstly, most family firms are SMEs. Secondly, founders of family firms are obviously entrepreneurs, having perceived an opportunity through the creation of a new firm (Aldrich et al., 2003). Though, the extent of entrepreneurial behavior within the organization tends to change over time (Kellermanns et al., 2006). The founders often become more conservative and risk-averse decision-makers because they fear losing family wealth (Sharma et al., 1997). The entrepreneurial impetus becomes diluted over time, and entrepreneurial practices become subsumed by other concerns (Fletcher, 2005). Here, corporate entrepreneurship, e.g. through the hiring of external managers who assist or even replace family managers sets in (Kellermanns et al., 2006).

Major areas of family firm research

Goals and performance of family firms

The majority of mainstream theories within business research consider economic reasoning, i.e. wealth creation, as the major goal for any business organization. In family firms, the situation could be different, and also non-economic goals play a major role in the decision-making processes of the firm (Stafford et al., 1999; Olson et al., 2003). The success of a family firm would accordingly depend on effective management of the intersection between the family and the business (Sharma, 2004). Recognizing that family firms almost always include family as well as business dimensions, performance of family firms will also most like include both family and business dimensions (Mitchell et al., 2003). Understanding how the influence of a family might affect a business and its performance opens up interesting new avenues of research, as Chrisman et al., 2006 state. If family firms do have economic as well as non-economic goals, the measurement of the overall performance may be particularly difficult (Hienerth et al., 2006). Besides, it is not said that there is heterogeneity within the group of family firms.

Results of previous empirical studies indicate that family goals are often more important to the owners of family firms than to the owners of non-family firms, or in other words – financial goals might be traded in account of (non-financial) family goals (Lee et al., 1996). Although there have been previous studies about the goals of family firms (Tagiuri et al., 1996), the driving forces behind these goals is still in its infancy. Altruism, fairness, justice and generosity have been investigated as some of these drivers for non-economic goals (Schulze et al., 2001; Eaton et al., 2002; Lubatkin et al., 2002). Nevertheless, goals of different family members can also be different, and vary over time, i.e. an individual’s life cycle, as Hoy, 2006 calls it, which might also result in differences in power and status of family members. Using the RBV as foundation (cp. previous chapter), the creation of “familiness” as proposed by Habbershon et al., 1999 and Habbershon et al., 2003b) might be a further driver for a family firm’s goals. Summarized, they say that the intersection of family and business lead to hardly duplicatable capabilities that make family firm peculiarly suited to survival and growth. If this familiness can be transferred from one generation to another as a heritage, this might be core of the family firm concept (Baker et al., 1998; Kelly et al., 2000; Poza et al., 2001). Aldrich et al., 2003 apply a so-called “family embeddedness perspective” by including the characteristics of family systems in their research approach (Aldrich et al., 2003). When it comes to performance of family firms, empirical studies such as the one from Morck et al., 2006 conclude that it is worse than in non-family firms due to reasons as the family’s desire for capital preservation, stability, and risk aversion. Authors like Schulze et al., 2003 see potential for inefficiencies that will have a negative impact on profit when ownership is concentrated in the hands of a single family. They argue that the owner-managers’ desire for family harmony and a tendency for altruistic behavior towards family members, coupled with ineffective control authorities create inefficiencies that outweigh the positive effects of alignment of interests that comes with the concentration of ownership and management. However, other authors see family firms ahead in terms of performance, and claim this through families being better stewards of firm resources due to less managerial opportunism within the company (Anderson et al., 2003; Lester et al., 2006).

(Psychological) Ownership

The basic model of ownership can be described as follows: the owner (subject), the own able object (object) and the relationship between them (ownership) (Ikävalko et al., 2006). In family firms, the owner is the connector between the social systems family and firm (Terberger, 1998). But ownership is not only an economic, but also always a psychological phenomenon Etzioni, 1991. Psychological ownership deals with the relation between individual persons and ownable objects, but does not necessarily also include legal ownership (Pierce et al., 2001; Pierce et al., 2005). Psychological ownership has been predominantly studied with regards to employee ownership (e.g. Buchko, 1992; Bartkus, 1997; Gample et al., 2002), e.g. by comparing employeeand conventionally-owned firms Frohlich et al., 1998. Pierce et al., 2001 summarized previous research on that topic and came to the conclusion that the psychological ownership emerges because it satisfies both generic and socially generated motives of individual persons. Existing SME research is filled with notions of owner-managers mentally connecting themselves to the firm, which constitutes a central part of the owner’s life and self-identity. In this context, the firm is both ends and means, being partly the result of action, partly a target of actions, and also an instrument to reach other targets. The ownermanager's mental connection to the firm is very unique – each owner-manager has his own way to look at his firm.

The concept of psychological ownership has been developed for already existing larger organizations. In that part of entrepreneurship research which is about new venture creation, the situation can be quite opposite, since the entrepreneur creates the organization. The object of ownership is accordingly the result of the owner’s actions. The owner-manager is at the same time the lawful owner and he may feel psychological ownership to the company that he owns.

Churchill, 1983 suggested that the entrepreneur’s and the company’s goals need to be differentiated in order to allow firm growth. Recent entrepreneurship and family firm research regards psychological ownership as a complex multidimensional construct Mattila et al., 2003. Four different dimensions of ownership can be summed up; 1) social, 2) legal, 3) ‘real’, and 4) psychological. Accordingly, the significance of psychological ownership has been pointed out also in the context of family firms (e.g. Brundin et al., 2005).

Business Succession

Business transfer

Since the inception of academic research in family firms in the early 1980s, the leading topic has been business succession (Dyer Jr. et al., 1998). In the next decade, about one third of all SMEs in the European Union are expected to be engaged in a business transfer. For Germany, it is estimated that around 700,000 enterprises, providing 2.8 mn. jobs, will have to be transferred to new owners every year (Commission, 2006, Schröer et al., 1999). These business transfers may result in a major restructuring of many industries, and, they could lead to substantial destruction of (tangible and intangible) capital, in case successors and acquirer cannot be found in sufficient numbers (van Teeffelen et al., 2005). Within this context, the European Commission tends to see business succession as a threat to the survival of small and medium-sized firms, and, as a threat to overall employment and economic growth (Commission, 2006). Due to the importance of a successful transfer of management within family firms, there has been much written about succession issues (Harvey et al., 1995).

As is apparent from previous research, only a limited number of family firm survive the transition to second generation and more than two-thirds cease or pass to new owners (Beckhard et al., 1983; Shanker et al., 1996). The transfer of top management from one generation to the next represents a crucial strategic issue of the firm (Barach et al., 1995). Business succession can be considered as a part of entrepreneurship, since the latter does not necessarily require persons to found new ventures. Brockhaus’ recent review of family firm research summarizes the key issues concerning business succession with the requirements for analysis “[…] from the perspectives of family, management, and ownership system in order to understand adequately the perspectives of the different stakeholders” (Brockhaus, 2004: 165).

According to Sharma et al., 2001, the business owner’s inability of letting go is the most cited obstacle to effective succession. Kommers & van Engelenburg (2003) also mention the psychological aspect as the most decisive, but offer no suggestion or solution. Emotional aspects lead to indecisiveness and delays of transfer (Landsberg, 1999; Flören, 2002).

Social capital

As Steier (2001) notes, there has been little attention devoted to the transfer of social capital within family firms. Social capital can be characterized e.g. by personal business contacts or networks (Brüderl et al., 1998). Although general interest in social relationships has been constantly rising within the field of entrepreneurship research (Jarillo, 1989), a recent literature review from Anderson et al., 2002 suggests that there is still a vast research gap with regards to transfer of social capital in the context of business succession within family firms.

Success of business succession

According to a study from the Netherlands which investigated the consequences of business transfer on business performance (Meijaard et al., 2005), corporate success can have several dimensions within this context:

1.) Survival and continuity of the business.

2.) The (subjective) degree to which different stakeholders are satisfied with the business transfer. The satisfaction with the business transfer corresponds to possible changes in the commitment to the business and the motivation of the different stakeholders to continue the business (Sharma et al., 2003).

3.) Quantitative (objective) measures, such as profits, sales and growth.

Subjective (satisfaction with the business transfer) and objective measures (changes in firm performance) can yield very different results. For example, a business transfer that results in increased profits does not necessarily need to be perceived as satisfactory by all stakeholders.

Conclusion and Implications

This article has tried to give an overview about what family firms actually are, and how far extant academic literature is in researching these particularities. Accordingly, this article has delivered an extensive overview of existing literature on family firm research, and confirmed that this research area is still in its infancy. As our article discovered, not all family firms are alike, and not all family firms will therefore perform similarly (Lester et al., 2006). Moreover, family firms are – like SMEs – an extremely a homogeneous group of firms, and future research should thus concentrate more on the inherent differences within the large population of family firms (Nordqvist, 2005).

The traditional process of family firm research is to produce theoretically grounded, valid, and reliable knowledge with the aim to transfer it to specific real-life situations later on. This picture of the scientific process is very close to the understanding of natural scientists. However, social science copes with another kind of reality: Social realities are autopoetic in that they are selfreferring und constructed only within the social process itself. Thus, a research program that has been developed in order to gain knowledge on nomological reality cannot be transferred to social science. The social reality is extremely complex and dynamic. This is especially true for the family firm setting, where social phenomena such as power, love, hate, trust and selfcommitment

play an important role. We will of course by no means be able to produce enough knowledge in time order to understand the ever-changing social reality. Thus, following the ideal of the objective (non-normative) research program of natural sciences, we will also never be able to give practitioners useful advice that is tailored to the specific situation. Neither will we be able to give them orientation in decision-making processes. However, that is exactly what researchers – especially in family firm research – have set out to generate.

One possible way out of this dilemma is not to the never-ending test of objective, abstract theories using too small, too specific and biased samples, but to train family firm managers to develop their own ideas about the causal structures behind social processes (subjective theories). These theories do not have to be true – an ideal idea which obviously will never be reached. The subjective theories have to be useful for the family firm manager! Researchers can support this individual theory building by providing information on typical situations and processes observed in social reality. Testing hypotheses on mono-causal relationships cannot perform this task. We have to apply a holistic approach in order to typify social situations with as much variables as possible. For the resulting typology of configuration, the historical conditions of development have to be investigated. Once, there has been drawn a path of past development considering all relevant variables we are able to formulate prognoses on the future development within a specific corridor. On the bases of such prognoses, we can formulate practically useful suggestions for the management of family firms for each type of situation. This calls for a new, research program in family firm research, which is grounded on a holistic approach to social reality and reverts to heuristic methods.