The importance of the family system in family business

Abstract

Purpose - Most researchers overlook the family system in the pursuit of family business studies and research. They mistakenly have assumed that the study of only the family business is sufficient to understand the influence and effect of the family itself. The importance the family system is documented as well as the evolution of family business as a field of study and various family business definitions. Conceptualizations of the family business are critiqued and the Sustainable Family Business Theory (SFBT) is presented relative to its board and detailed emphasis on the family system. This paper aims to address these issues. Design/methodology/approach - This article is a review of previous family business research including specific conceptual models developed in the literature, particularly relevant to the inclusion of the family system. Findings - Few researchers examine the family system in detail but those that do are reviewed and discussed. Research limitations/implications - Research, teaching and practice must be conducted with the recognition of the family system relative to the family business. Social implications - Recognizing the family system for its unique social contributions will have impact on future research, teaching, and practice. Originality/value - This review of previous research offers researchers a broader and comprehensive view of the family business, which is inclusive of the family system, as well as the business system and their respective interactions. Researchers, educators, and practitioners will benefit from this paper.[PUBLICATION ABSTRACT]

1. Introduction

The family is, no doubt, the oldest and longest running social unit in our world. Families were formed along with small communities long before commerce began. In fact, families, often in connection with the local communities, sustained themselves by self-sufficient means ([37] Ponzetti, 2003). Although the business enterprise is, of course, integral to the long-run sustainability of the family firm, the family is equally important to the family firm. The family unit brings together and creates the forces enabling the emerging and sustained entrepreneurial behavior. The conceptualization of the family business must encompass a multidisciplinary and comprehensive perspective of the complex and dynamic phenomenon of business that is owned and operated by family members.

The emergence of business concerns from within families is simply a historical fact and a nature and logical phenomenon. For their sustainability, families must provide for their members, earn a living day to day, and, very often, desire to accumulate wealth over time. Businesses started and operated by families have historical ties to farmers, guild members, crafters, and local commerce, to name a few. So, often historically, the physical location of the business was synonymous with the actual business location and operations and the family. Even in the case of the early, small-scale storefront businesses, families often lived in the upper floors of the building with the store on the street level. Or in the case of farmer, the family was quite literally in the midst of the agricultural activity and, in some cases, the actual growing or producing of vegetables, poultry, eggs, or milk and its related products were carried by family members on the farm. Only with the industrial age, did the segmentation of the family from the business widen along with the development of wage or salary work for a non-family employer ([22] Heck et al. , 1995).

Family businesses in our society and economy have strong historical presence and extensive prevalence, as well as vital economic and social contributions ([23] Heck and Stafford, 2001; [24] Heck and Trent, 1999). Nonetheless, family business as a field of academic study is recent and still emerging. Scholars have begun to recognize the importance of family businesses and their connection to entrepreneurship ([38] Rogoff and Heck, 2003; [47] Zachary and Mishra, 2011). The prevalence of family firms as the most prevalent business structure in the USA has been documented ([24] Heck and Trent, 1999) and worldwide ([4] Bosma et al. , 2008; [27] International Family Enterprise Research Academy [IFERA], 2003; [33] Morck and Yeung, 2004). The entrepreneur is a central and vital player in the entrepreneurial phenomenon, but he or she is only part of the total picture ([47] Zachary and Mishra, 2011). A new broader and more comprehensive view or approach, based on the concept of family entrepreneurship and the family business, may be the most accurate description of most businesses throughout the world ([8] Danes et al. , 2008; [20] Heck et al. , 2006; [38] Rogoff and Heck, 2003; [42] Stafford et al. , 1999).

Most researchers have overlooked the family system in the pursuit of family business studies and research. They mistakenly have assumed that the study of only the family business as an entity is sufficient to understand the influence and effect of the family and the understanding of the family system itself. In fact, the family business is most often the manifestation of the associated family system. To fully understand the family business, one must examine the family system separately and in conjunction with the business. Further, the role of family in family businesses and entrepreneurial activities is paramount ([21] Heck et al. , 2008).

The importance the family system will be presented and documented. The evolution of family business as a field of study will be discussed, as well as the various family business definitions. Conceptualizations relative to families and businesses and entrepreneurship will be explored and critiqued. Previous research models and findings will be examined relative to their relative emphasis on the family system.

2. The importance of the family system

The family, with its own dynamics, is an important and fundamental entity for creating and sustaining behaviors described in the literature as entrepreneurial behavior or experience ([7] Cramton, 1993; [8] Danes et al. , 2008, 2010; [38] Rogoff and Heck, 2003; [41] Sharma, 2004; [42] Stafford et al. , 1999). Family capital, the total resources of owning family members, enables and foster short-term family business success and long-term sustainability ([10] Danes et al. , 2009).

Throughout history and across countries, families and business have always existed to a large extent in conjunction with each other ([22] Heck et al. , 1995; [29] Kepner, 1983; [33] Morck and Yeung, 2004; [38] Rogoff and Heck, 2003). The economic necessity of earning a living and supporting a family is often the underlying motivation for starting and growing a business ([44] Winter et al. , 1998). Among other motivators, lifestyle and wealth accumulation goals play an important role in whether a particular family member or members choose to start a business. At the same time that the business supplies income to the family, the family may supply paid and unpaid labor, as well as contribute additional resources such as money, space, equipment, and other factors of production to the business.

Both conceptual and operational considerations of the Sustainable Family Business Theory (SFBT) ([8] Danes et al. , 2008; [42] Stafford et al. , 1999) provide the means to examine the vital contributions of the family system in relation to a family business. A comprehensive and flexible theory such as the SFBT can enhance our understanding of the dynamic role of the family in family business, as well as demonstrate integration of the family, business, and community. [48] Astrachan (2003) has commented that the SFBT both conceptually and empirically "[...] exemplifies what is at the heart of the family business field: the study of the reciprocal impact of family on business" (p. 570).

[38] Rogoff and Heck (2003) have noted that "the growing body of research points to the fundamental guiding principle that the combustion of entrepreneurship cannot ignite and grow without the mobilization of family forces". (p. 560). [34] Olson et al. (2003) have empirically shown that both business outcomes and family outcomes are simultaneously determined by factors from and within both the family and firm system. In a study investigating the contribution of family capital to family firms in the short term, all types of family capital explained 13.5 percent of variance in gross revenue and 4 percent of variance in owner's perception of success. In the long term, all types of family capital explained 26.7 percent of variance in gross revenue and 11.6 percent of variance in owner's perception of success ([10] Danes et al. , 2009). In a longitudinal study of spousal capital as a resource for couples starting a business, [32] Matzek et al. (2010) found that spousal capital affects both the business sustainability of a new venture and for couple relationship quality.

3. The evolution of family business as a field of study

Throughout history, families have been critical to the creation and operation of businesses. Families are the most important sources of human capital, social capital, financial capital, and physical capital. Worldwide, from ancient to modern times, and from agricultural and cottage industries to multinational corporations, family ownership is pervasive ([27] IFERA, 2003). [33] Morck and Yeung (2004), for example, note that in some countries, like Mexico, family firms make up about 100 percent of all firms, in others, like Sweden, they represents about 50 percent of all firms, and in other yet, as the USA and the UK, family firms are a minority. The reasons why family businesses and family entrepreneurship has long been ignored stem from the fact that most business research has historically been industry based in its samples and methodologies, leaving a long legacy of segmented and disjointed studies which are most often industry or market specific.

Although some early researchers gave recognition to businesses who involved family members, these exceptions were predominantly business consultants who observed the nature of business in general. [11] Donnelley (1964) developed an early but narrow definition of family business. His definition included one or more of the following conditions:

- existence of family relationships as a key factor in succession;

- presence of family member on board of directors;

- reflection of family values in business;

- actions of family member reflected on reputation of business;

- presence of relatives involved and who felt obligated to hold stock for more than financial reasons;

- relationship between family members' positions in the business and their standing in the family; and

- entering the firm being part of family members' career decisions.

Donnelley's definition reflected early consulting observations of family businesses but was burdensome in meaning, empirically complicated to implement, and was not utilized in subsequent research studies. [25] Hershon (1975) suggested that, in the USA, half of the GNP was produced by family firms and that these firms employed half of the workforce. However, these initial acknowledgements of family entrepreneurship did not look beyond the business setting.

Subsequent scholars ([30] Lansberg, 1988; [6] Brockhaus, 1994; [13] Dyer and Handler, 1994; [26] Hoy and Verser, 1994) also prioritized the business aspects of the family business, but did not explore the owning family. These family business models used by these researchers were very simplistic, unbalanced toward the business, and limited in their depictions of the owning family. Equally myopic, early researchers in family studies rarely recognized the presence of business ownership within the families studied. Classical family systems theory ([5] Bowen, 1985) developed from clinical work with actual families, but did not include any specific recognition that owning and operating a business might affect the lives of owning family and family members.

Later and from the perspective of family sociology, the qualitative research on family businesses by [39] Rosenblatt et al. (1985) explored both the family system and the business system, and included the overlap between these systems, tensions, role carryovers, compensation, management of the business, working with relatives, and succession and inheritance. [7] Cramton (1993) identified the missing perspective in most business research of family firms and move in a new direction of noting that both family and business perspective together show the uniqueness of a family firm and the critical role that families play in the creation, operation, growth, maturity, and succession of most businesses. Unfortunately, since then, still little attention has been paid to how family dynamics affect the fundamental entrepreneurial process, particularly in business research (notable exceptions are [1] Aldrich and Cliff, 2003; [38] Rogoff and Heck, 2003).

The recognition of the role of family in entrepreneurship led family economists and family studies researchers to attempt the simultaneous and comprehensive study of both the family and the business ([41] Sharma, 2004). Among others, [18], [19] Heck (1998a, b) discussed the phenomenon of an entrepreneurial family and suggested the notion that both the family and the business were equal contributors to the family firm. In the late 1990s, along lines similar to [7] Cramton's (1993), the Family Business Research Group (FBRG) began developing its conceptualizations of the first nationally representative sample of US family businesses. The project used a household sampling frame and developed the 1997 National Family Business Survey (1997 NFBS) ([42] Stafford et al. , 1999; [44], [45] Winter et al. , 1998, 2004). This conceptualization yielded the SFBT, which was hailed as innovative because of its ability to delineate both functional families and profitable businesses ([43] Trent and Astrachan, 1999). Using a household sampling perspective was deemed as "[possibly] one of the biggest methodological breakthroughs since the founding of the family business field" ([3] Astrachan and Kurtz, 1998, p. v). Researchers finally had a model available and high-quality data to begin studying of the role of family in the family business or family entrepreneurship.

4. Family business definitions and conceptual frameworks

The importance of the family system and the development of our family business field are essential in our understanding of the current state of our conceptualization and theory building. Hence, the role of the family system in the conceptualization of family business or family entrepreneurship are critical to our understanding of how entrepreneurial or family business emerges and sustains itself via its interactions with environmental contexts both near and far. Conceptually, after years of studies centered on the entrepreneur as an individual, scholars have begun reexamining the entrepreneur through a wider lens. What has been revealed is that focusing only on the entrepreneur provides an incomplete picture of the entrepreneurial phenomenon ([46], [47] Zachary and Mishra, 2010, 2011), and scholars can no longer ignore a broader and more comprehensive view of entrepreneurial activity namely, the role played by the family system ([7] Cramton, 1993; [8], [10] Danes et al. , 2008, 2009).

4.1 Family business definitions

From [11] Donnelley (1964) to today's family business definitions (e.g. [35] Pearson et al. , 2008), family entrepreneurship remains in limited use. Most definitions seem to include notions of family ownership, family control or management, family involvement, and/or the intention to transfer the family firm ([24] Heck and Trent, 1999). Some definitions are very narrow and limited by their inclusion of the criteria having two generations involved in the business while others are very inclusive of any business owned by one or more family members. [31] Litz (1995) identified family businesses conceptually based on ownership, management, and intention to transfer. He developed a classification of nine business types and identified four of the nine types as family businesses or potential family businesses. Along similar lines, [17] Handler (1992) identified four ways in which theorists usually define family business: degree of ownership and/or management by family members, degree of family involvement, potential for generational transfer, or multiple criteria. Although this conceptual works further developed definitions of family business, their definitions were not applied to empirical data.

The notion of "familiness" has sometimes been employed in the literature. [15] Habbershon and Williams (1999) and others that followed have attempted to identify the influence of the family on and in the business by delineating ways in which the family's factors were present within the business. Family's presence in the business is simply the manifestation of the internal dynamics of the family in and of itself. [35] Pearson et al. (2008) explored this familiness notion further, but these researchers still only recognize the family presence in the business and do not recognize the presence, importance and the role the family itself relative to the business or entrepreneurial activity.

[44] Winter et al. (1998) defined family business as a business that is owned and managed by one or more family members. These same researchers used the concept of a family household, which was defined as a group of people related by blood, marriage, or adoption, who share a common dwelling unit and participated in the ownership of a business. For the nationally representative 1997/2000/2007 National Family Business Panels (NFBP), a minimum of a one-year work intensity requirement for the owner-manager was also imposed. Specifically, the owner had to have worked at least six hours per week year round or a minimum of 312 hours a year in the business ([24] Heck and Trent, 1999).

4.2 Conceptual frameworks of the family firm

A number of conceptualizations and theories are applicable to the notion of family business or family entrepreneurship. These include, in descending chronological order, the following:

(1)] the Sustainable Family Business Theory Model (SFBT Model) ([8] Danes et al. , 2008; [20] Heck et al. , 2006; [42] Stafford et al. , 1999);

(2)] the Bulleye model of an open-system approach ([36] Pieper and Klein, 2007);

(3)] the Family Embeddedness Perspective (FEP) ([1] Aldrich and Cliff, 2003);

(4)] the Family Influence, F-PEC Scale ([2] Astrachan et al. , 2002);

(5)] the Theory of Agency and Altruism in Family Firms (TAA) ([40] Schulze et al. , 2003);

(6)] the Resource-Based Framework ([15] Habbershon and Williams, 1999); and

(7)] the Unified Systems Perspective of Family Firm Performance (USP) ([16] Habbershon et al. , 2003).

Discipline-based frameworks such as TAA attracted significant attention because of their ability to allow a specific representation of economic concepts and theories. At the same time, they also are less comprehensive in scope ([40] Schulze et al. , 2003) and as suggested by [14] Greenwood (2003) who has argued that economics as a singular framework may not be sufficient.

The Bulleye model of an open-system approach ([36] Pieper and Klein, 2007), the F-PEC scale ([2] Astrachan et al. , 2002), and the notion of familiness ([16] Habbershon et al. , 2003; [15] Habbershon and Williams, 1999) only model family firm level concepts and associated measures. As a result, these frameworks do not identify or recognize that the family system in and of itself, is separate from, yet inextricably intertwined with the business system. These models are examining family constructs as manifested within the business only, and do not address the family system as a separate, whole and unique system relative to the business.

Other frameworks have sought to integrate a multiperspective along with greater detail and to delinate the relationships between the family system and the business system; namely, The FEP ([1] Aldrich and Cliff, 2003) and SBFT ([8] Danes et al. , 2008; [20] Heck et al. , 2006; [42] Stafford et al. , 1999). Among the all frameworks considered above, only these latter two have specified the family system in relation to the business entity, though they each conceptualize these systems and their relationship to each other differently.

The increasing number of research frameworks allows researchers varied approaches based on the scope and depth of the research questions and foci under study. At the same time, researchers must acknowledge the advantages and disadvantages of the framework choice. Research that recognizes both the family system and the business system will offer the most comprehensive examination and are the most likely to increase our future understandings of the family firm and family entrepreneurship ([8] Danes et al. , 2008; [12] Dimov, 2007; [28] Jennings and McDougald, 2007; [20] Heck et al. , 2006; [38] Rogoff and Heck, 2003).

4.3 The SFBT

As previously noted, the owning family brings together and creates the resources and conditions from which entrepreneurial behavior emerges and is sustained over time. The family, with its own dynamics, is an important and fundamental milieu for combining and creating behaviors described in the literature as entrepreneurial behavior and experience ([8] Danes et al. , 2008; [38] Rogoff and Heck, 2003; [42] Stafford et al. , 1999). But what is exactly the role of family in the family firm or family entrepreneurship? The SFBT introduced in the previous section posits a dynamic, behaviorally based, multidimensional family theory of the firm that accommodates both business and family detail and complexities, and provides a useful framework for the analysis of key concepts related to family business ([8] Danes et al. , 2008).

Families and businesses provide resources to the entrepreneurial endeavors of family members in the form of social capital, human capital, and assets including both financial and physical capital ([8] Danes et al. , 2008). Social capital includes the interrelations between and among family members. For example, trust is a specific aspect crucial to entrepreneurial activity. Family businesses have an advantage over non-family businesses due to the enhanced possibility of trust among family members. Human capital includes the human attributes of the individuals in the family such as personal time and energy, as well as emotional support. The concepts of financial and physical capital include money, credit and financial investments of all kinds, as well as land, real estate, and equipment ([8] Danes et al. , 2008).

But families and businesses also have constraints that limit entrepreneurial activity. These constraints may be social, cultural, legal, economic, and technical. Socio-cultural constraints center on the norms and mores of the community and the social sanctions imposed by the violation of these norms. Legal constraints are the laws and regulations imposed by political entities. Economic constraints are limitations imposed by finite resources. Technical constraints are the laws of biology, chemistry, and physics that processes must abide by ([8] Danes et al. , 2008).

The effects of resources and constraints generated by the family and the business are mediated by family structure as well as business structure. Family structure includes the roles and rules of the family system. In family firms, owning families may need additional family structure, for example, a family council to handle or manage a variety of family matters. Such family structures help to reveal which member leads and how, and how to manage and allocate family resources and adjust constraints ([8] Danes et al. , 2008). Business structure includes ownership and governance ([8] Danes et al. , 2008).

In addition to constraints, families and businesses encompass disruptions . Normative disruptions are those, for example, that may occur when major family events occur such as birth or death and holidays or ceremonies. Non-normative disruptions, instead, are those that cannot be predicted or highly unusual. An example would be a natural disaster that forces temporary or permanent closure of the business ([8] Danes et al. , 2008).

Families and businesses each provide processes. Processes within families and family-owned businesses are a form of social capital and operate during times of stability and take place within each system. These processes can be thought of as routine, or standard operating procedures. Processes during times of change occur in the overlap of the family and the business ([8] Danes et al. , 2008).

Resources and constraints along with disruptions which are mediated by processes lead to families and businesses achievements, which are evaluated in multidimensional ways where subjective indicators such as family and business harmony, satisfaction in the family and in the business, and the achievements of goals in both systems are as important as financial success ([42] Stafford et al. , 1999). In addition, the family firm interacts with its surrounding community, as well as the community affects both the family and business systems ([8] Danes et al. , 2008). Both short-term family business viability and long-term family business sustainability evolve over time via the SFBT and its delineations ([8] Danes et al. , 2008).

5. Implications for family business scholarship

Without the recognition of the importance of the family system, we are left with a partial and incomplete view of the family business. Some effects or factors attributed to the family business may actually be fundamentally tied to the family system itself. Also, important variables need to be identified and studied relative to the family system. For example, family business growth may equally attributable to growth in the outputs of the business and to the growth in the number of family members supported by the business.

As we conduct our future family business research, teaching, and practice, we must encompass both the family system and the business system and interplay between each system. This broader and detailed view must be implemented throughout our research process including all of its parts of conceptualizations/theories, sampling frames, measurements, analytics, interpretations, conclusions, implications, and applications.

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Appendix

About the author

Ramona K. Zachary is the Academic Director of the Lawrence N. Field Programs and the Peter S. Jonas distinguished professor of Entrepreneurship in the Department of Management of the Zicklin School of Business at Baruch College - The City University of New York located in New York City. Professor Zachary teaches and conducts research related to family businesses and the owning family's internal social and economic dynamics, the effects of the family on the family business viability over time, the economic impact of family businesses on communities, minority business ownership, and gender issues within family firms, as well as entrepreneurship issues and research. She has published numerous articles on family business, home-based businesses, family labor force, family management and decision making theory, and public and private policies related to businesses and families. She has edited two books entitled, Home-Based Employment and Family Life and The Entrepreneurial Family . Most recently, Dr Zachary is serving as a co-editor of the new Entrepreneurship Research Journal with Berkeley Electronic Press. She received her PhD from Purdue University and is associated with several professional organizations including the IFERA. She is currently serving on its Board and as the director of its Research and Publications Subcommittee. Ramona K. Zachary can be contacted at: [email protected]