Leadership Requirements in Family Versus Non-Family Business, Essay Example

There are significant differences in leadership requirements for family businesses in comparison to those skills required in bureaucratic or non-family based business.  Family business represents approximately three-quarters of all businesses, not just in the United States, but in most countries around the world.  These businesses are not necessarily small and insignificant; some family businesses are iconic companies.  Leaders in family businesses are determined on different criteria’s opposed to the leaders in non-family businesses.  Family business requires skill set based on succession, trust, and social association; whereas non-family businesses base their leaders skills on education, experience, and competition.

Perhaps a viable option in determining the requirements for leaders in family and non-family businesses is to look at the purpose of the business.  No one goes into business with the intentions of it failing.  However, some entrepreneurs start their business with the vision of it remaining in the family, others with the intentions of hiring as many qualified employees as necessary to keep increasing profit.  Better explained by Stravrou as, “Where the purpose of the firm is to make money, the purpose of the family is to care for and develop its members” (Stavrou, 2003).  This theory runs over into family business and many lines that should, ideally, separate family and business are virtually non-existent.

The expectations in leaders skill set may fluxuate excessively between the two discussed businesses.  A variable to consider is the relevance of a position being inherited, and one being earned.  Family firms depend on family members to make strategic decisions.  Often the leadership succession is based solely on personal influence in contradiction of the non-family based businesses regulation of governance. “As a response to external uncertainty, the family firm has increasingly been interpreted as a network of trust that is, in turn, embedded in a wider locus of connections often centered on the local business community.“  (Colli, Fernandez, & Rose, 2003).  This leadership’s skill is different from the expectations in leaders for other businesses.  Family firms often utilize successors based on personal ties and relationships, and non-family owned businesses lean towards formal task-oriented preparation of successors.

Growth, development, and overall success of the family business maybe tainted in some ways.  For any business to succeed, they need to be constantly willing to explore new options and utilize resources.  Family businesses passing on the business being based on blood versus qualification could drastically hinder the growth of that specific business.  Family based business see their leaders and succession associated with long-term orientation, a strong-relationship, trust, loyalty, similar visions, and belief and values.  Traditional business envisions their leaders based on honesty, integrity, skills, and overall what they will bring to the company.  They can be selective to determine which characteristic and qualities will best serve their betterment.  Family businesses are typically inherited and have a very little room for selection.

The lifecycle of any business is start-up, rapid growth, maturity, and decline.  Once it hits the decline point the owner has two options, either rebirth or death.  Family leader succession, based on those skills typically considered could destroy that business.  It is estimated that thirty-percent of succession from first to second generation will survive.  When an owner passes on the business from the second generation to third generation, it is estimated that there is only a fifteen percent chance of survival.  When the family business is passed down beyond the fourth generation, only three to five percent succeed.  These numbers are disturbing; especially considering the skill requirements of the successor could drastically change such statistics.  Even more astonishing is the fact that eight-six percent of family firms still plan on their business being carried on by the next generation.

“There is a risk of family members making bad decisions based on sentiment not reason, or worse, devoid of the skills required to carry out the job successfully.” (Schulze, Lubatkin & Dino, 2003) There is a lot of truth to education being a viable resource in decision making.  Owners of family businesses go into their field with a specific dream in mind.  Chances are they educated themselves before taking on such a venture.  They wanted to make sure that their time, effort, and money would not be wasted.  However, when being passed from generation to generation, it is almost assumptive that the business that they built would be successful regardless of the skills the chosen successor.  This is probably one of the more significant characteristics associated with required leader’s skills in family to non-family businesses.  A traditional business would not consider assigning a successor void of necessary skills to be successful.  They have candidate after candidate with many variations of skill level to choose from.  That chosen leader will have either a positive or devastating effect on that business.

Another big variable for leadership succession in family firms is based in insider succession to reduce uncertainty while maintaining control.  If it is kept in the family, all that hard work will not be for vain, the family is still benefiting from it, and the owner still has some type of control.  Family firms can be short lived based on the nature of generational transition.  “The notion that family firms are embedded within social networks of trust implies that shared values and attitudes influence both family and business behavior.” (Colli, Fernandez, Rose, 2003)  According to Colli, Fernandez, and Rose’s theory, if an owner is trustworthy with certain values and attitudes, the family successor should also be the same.  Sadly these skills are not transferrable based on genetics or family ties.

 The governing factors within the family firm are determined on social norms, both family behavior and aspirations of individual leaders affect the strategies of leadership succession.  The risk of failure for future leaders is protected in family business from economic consequences of uncertain adverse events.  “For the entrepreneur, the business is essentially an extension of himself. . . . And if he is concerned about what happens to his business after he passes on, that concern usually takes the form of thinking of the kind of monument he will leave behind.” (Neubauer & Lank, 1998) The further the business transfers way from the initial owner, the less importance it has on being a monumental symbol.

An individual being socially situation, involved in the everyday practice is important for family business leaders.  There are three main principles drawn from such situated learning theory.  “First, the family and the business are examined as overlapping communities of practice, as sites of practice-based knowledge. Second, the concept of legitimate peripheral participation is explored in relation to members of the family business. Finally, how practice is both reproduced and transformed over time is examined in the context of two generations’ participation in a family business.” (Hamilton, 2011)  There are three main principles introduced from situated learning theory, this included legitimate peripheral participation, cycles of reproduction and transformation to analyze empirical material, and communities of practice.   Succession may be understood by the extent of participation in the family business. This family leader performs the everyday tasks, knowing the ins and outs of the business.  These leaders have established consumer ties from being involved in the business. Seeing first hand what has made that business as successful as it has been. In that respect, one of the major considerations in family firm research is the question whether family involvement can lead to a competitive advantage.  Is that family successor stuck in the “this is how my father did it this is how I am going to do it mentality.”  Or is that successor willing to look past what they have been taught to consider potential improvements for changing times.  Leaders in non-family businesses success is dependent on finding ways to cut cost, improve the bottom line, and improve employee satisfaction.

“Paul Karofsky and colleagues found that, for family business owners, personal satisfaction and business accomplishments were intertwined in family businesses.” (Karofsky et al., 2001)  Another leadership skill is the over all well-being of that specific leader.  Many positions require long hours and hard work.  “Long hours are not confined to the context of family business; indeed many corporate managers would count this as an aspect to their work.” (Spurgeon, & Cooper, 2001) Many leaders have learned that in order to be successful they have to be willing to work long hours.  They may be the first person in – in the morning, and the last one out.  By no means can it be assumed that a family business leader would not do the same, however they are not typically trying to prove themselves.  Their position is inherited, not necessarily earned.  Some families successors feel it necessary to maintaining versus improve. Leadership skills vary in many notable areas from family to non-family business functions.  First consider responsibility and accountability.  Family businesses have a predetermined employee plan for their next generation.  They encourage risk taking with little fear of repercussions.  Accountability is minimized as well knowing that because its family there is a lot less risk of job loss.  In a traditional business, a leader knows that they are responsible for their actions.  If they fail to meet standards, or work up to the set expectations, they can be easily terminated.  Second consider the leadership skill necessary in the vision.  Family business leaders typically articulate the vision and goals for their future.  In traditional business, there is often a mission statement, shared goals, and overall end desires, but the individual leader needs to find their own vision on how to get to the end product.

Another area of skill variation in family business leaders to non-family business leaders is the personal care in achieving goals and their personal passions.  Family leaders are often encouraged to pursue their dreams in or out of business.  In addition, the leaders overall well-being is important to the business.  Non-family businesses there is little lead way given in a leader’s personal care towards achieving their goal and passions.  They are expected to hone the proper skills to reach this point on their own motivation and determination.  Self-discipline is a leadership skill that is viable for both family and non-family businesses.  Leaders should be able to direct with controlled limitations. Maintaining professionalism and the best interest of the business at all times. Both family businesses and non-family businesses heavily rely on people skills.  These skills can include being well versed, articulate, and able to communicate well with both employees and customers.  In a family based business, this maybe an easier skill for the leader to acquire if the employees are family and the consumer base is already established.  Leaders for both discussed business types are expected to also entertain a combination of intuition and analytic competencies.  This is where problem solving and decision making would come into play. The final notable leadership skill would be ethical behavior.  This is essentially the integrity that encompasses a leader.  In a non-family business, a leader must operate with respect, accountability, honesty, forthrightness, humility, and charity.  Unethical behavior in any manner could lead to the termination of that individual.  A family business, these same skills are expected, but failure does not typically lead to termination, and maybe overlooked.  Exceptions are always made in family business because the loyalty to family is far greater than ethical in appropriation. Family business requires skill set based on succession, trust, and social association; whereas non-family businesses base their leaders skills on education, experience, and competition.   There is a danger of leaders being chosen on the basis of blood rather than capability and competence.  Knowing the odds of successful family business succession, it is even more imperative to consider all options for any family business.  Leaders require specific skills for a company’s success.  These skills should be the same for both family and non-family business, even though all too often, they are not.  There are significant differences in leadership requirements for family businesses in comparison to those skills required in bureaucratic or non-family based business.   The standards are lax due to the blood that ties them together, however, leadership skills can be the determining factor in any businesses success or failure.

 

References:

Baines, S. & Wheelock, J. (1997) A Business in the Family: An Investigation of the Contribution of Family to Small Business Survival, Maintenance and Growth. Institute    for Small Business Affairs Research Series.

Colli, A., Fernandez, P., & Rose, M. (2003). National Determinants of Family Firm Development ? Family Firms in Britain, Spain and Italy in the Nineteenth and Twentieth Centuries. Enterprise and Society, 4, pp. 28-64.

Hamilton, E. (2011) Entrepreneurial Learning in Family Business: A Situated Learning  Perspective.  Journal of Small Business and Enterprise Development, Vol. 18            8-26

Karofsky, P., Millen, R., Yilmaz, M. R., Smyrnios, K. X. & Et Al. (2001), Work-family Conflict and Emotional Well-Being in American Family Businesses. Family Business Review, 14,      313.

Scholes, Louise, Paul Westhead, & Andrew Burrows. (2008) Family Firm Succession: The Management Buy-out and Buy-in Routes. Journal of Small Business and Enterprise Development, Vol. 15, pp.8 – 30

Neubauer, Fred & Alden Lank. (1998) The Family Business: It’s a Governance for Sustainability. p.145.

Schulze W.S., Lubatkin M.H., & Dino R.N. (2003). Exploring the Consequences of Ownership   Dispersion Among the Directors of Private Family Firms.  Academy of Management       Journal, Vol 46, pp.179-194.

Spurgeon, A. & Cooper, C. L. (2001) Working Time, Health and Performance. In Cooper, C. &  Robertson, I. T. (Eds.) Well-being in Organizations: A Reader for Students and     Practitioners.

Stavrou, E. T. (2003), Leadership Succession in Owner-Managed Firms Through the Lens of Extraversion. International Small Business Journal, 21, pp. 331-347.