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MNE3703 EXAM PACK 2022
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MNE3704NOTES
,Chapter 1: The Family Business (Pg 2 – TB)
INTRODUCTION
Family businesses are major contributors to economic growth in free economies all over the world. Statistics indicate
that Family businesses constitute (80 to 98%) of all businesses in the world’s free economies and employ more than
75% of the working population around the world. Poza (4th Ed) expresses concern about the high failure rate of family
businesses and the transition of the business to the third generation. Nevertheless, family businesses that are agile
and niche focused and that deliver high-quality customer service continue to thrive.
Family businesses make a significant contribution to South Africa’s economy. Some 84% of businesses in South Africa
have been identified as family businesses, including some well-known family businesses with a proven track record.
WHAT CONSTITUTES A FAMILY BUSINESS?
Family businesses are all enterprises in which an entrepreneur or next-generation chief executive officer (CEO) and
one or more family members significantly influence the firm through their participation, ownership control and strategic
preferences, and the culture and values they impart to the enterprise.
From research, Poza (4th Ed) indicates how difficult it is to find a universally acceptable definition of the term “family
business”. Four factors emerge as a working definition of a family business, which is a synthesis of the following:
ownership control (15% or higher) by two or more members of a family or a partnership of families
strategic influence by family members on the management of the firm
concern for family relationships
continuity across generations
th
Poza (4 Ed) describes four characteristics that define the distinctiveness of family businesses:
1) the presence of the family
2) the overlap between family, management and ownership, with its zero-sum propensities in the absence of firm
growth
3) the unique sources of competitive advantages derived from the interaction of family, management and ownership,
especially when family unity is high
4) the owner’s dream of keeping the business in the family (the objective of business continuity from generation to
generation)
SUCCESSION AND CONTINUITY
A factor that contributes to the uniqueness of family business is the extent to which succession planning assumes a
strategic role in the enterprise. A lack of succession planning is the most prevalent reason for the failure of family
businesses. In South Africa, family-owned businesses are visible in the townships of the previously disadvantaged
communities. Most spaza shops and other ventures are owned by a family member, and the grandparents, spouses
Page |2
,and children participate in the daily running and management of these ventures. They contribute to the combined
family income and form a critical part of the second economy of South Africa.
A family business is not a normal business because of the involvement of family issues which are, by nature, more
emotional. In addition to the problematic nature of family businesses, their contribution to socioeconomic growth has
never really received sufficient attention in South Africa. Questions and remarks such as “Who wants to do business
with family?” or “Stay away from family in business.” or “It is difficult enough to accept him/her as a family member and
now you expect me to go into business with him?” have aggravated the situation. These phrases are all too familiar in
the South African environment and may be a reason why family businesses have not received adequate attention until
now.
The family business sector is still characterised to a certain extent by a traditional mindset – from father to son, with the
mother there to look after the children. With more women entering business, this trend seems to be changing.
BUILDING FAMILY BUSINESSES THAT LAST
For family businesses to continue across generations, a balance has to be found between protecting the core of the
business success and adapting to a changing and competitive environment.
According to Maas (2009:228), the biggest concern regarding family businesses in South Africa is the level of family
business management skills. The majority of family businesses are simply not trained to manage their businesses
successfully — either business-wise and/or family-wise. This also influences their ability to manage risk in a fast-
changing environment where one needs to stay entrepreneurial in order to survive and grow.
Family businesses in South Africa are a growing sector, but there are certain deficiencies that impede their growth and
expansion, such as a lack of management skills. Decisions are still taken on an ad hoc basis without regard for
balancing the relationships between all subsystems.
THEORETICAL PERSPECTIVES ON FAMILY BUSINESSES
There are 5 theoretical perspectives on family business as follows:
1) The systems theory perspective:
The systems theory perspective of the family business, reveals the family business as a complex and dynamic social
system comprising three overlapping, interacting and interdependent subsystems, namely;
the family,
ownership, and
management.
This makes significant adaptive capacity and competitive advantage possible through joint optimisation. The
boundaries between these subsystems present unique challenges. Where priority is given to a particular subsystem, it
could lead to significant sub-optimisation of the family-ownership-management system, resulting in lower levels of
performance than the family business is capable of achieving.
Poza (4th Ed) distinguishes the primary focuses in family businesses with the following priorities:
Family-first businesses:
employment based on birthright
Stereotype – nepotism
Non-family managers with high career aspirations are often reluctant to join family businesses
Page |3
, Business exists primarily for the benefit of the family
The transfer of benefits to family members are often excessive
Lack of transparency and financial systems are usually obtuse by design and secrecy is paramount
Continuity must be regarded as important by both the current and future family generation in order for the
family to continue as a family business.
Management-first businesses:
Likely to discourage family members or require work experience as a prerequisite for employment.
Performance of employed family members is reviewed in the same manner as that of non-family managers
Next generation family members often viewed in terms of their ability to manage and grow the firm
No automatic commit to family-business continuity as the business is seen as a productive asset
Ownership-first businesses:
Focus on shareholders, EBITDA, earnings growth rates
Investment time horizon and perceived risk are significant issues
Financial results are evaluated more frequently
Danger of losing Patient capital – a significant source of competitive advantage of many family businesses –
may disappear at the hands of greedy shareholders. Family members may be caught in a web of high
expectations for short-term returns via dividends and may become prone to second guessing family members
in management. Family members who understand the limited capabilities of the business to deliver on the
promise of high returns, are most likely managing in the long-term interests of shareholders. Other family
members may be in favour of high returns and short time frames. This struggle may result in the loss of vision
by family members and the continuity of the business may be abandoned in favour of recapturing the value
created by the founders by selling the business.
Owing to the different goals and operating principles of each of the three systems in a family business, blurred
boundaries may occur between the family, ownership and management subsystems. It is, however, possible to
balance the goals and needs of each subsystem for the greater good of the larger system — the family business. Poza
(4th Ed) offers several suggestions for joint optimisation. The systems theory perspective is of particular importance.
2) The agency theory perspective:
Agency theory has traditionally suggested that the overlap between ownership and management (the agents) found in
family firms is an asset.
Agency theory’s more recent argument is that because of the altruism of owner-managers, family organisations have
one of the more costly forms of organisational governance. A number of sources of increased agency costs are cited
such as:
The owner-manager’s inability to resolve conflicts,
Executive entrenchment,
A lack of performance monitoring and goal incongruity between the CEO and the rest of the family and
A preference for less business risk.
A lack of monitoring the firm’s performance
According to the Agency theory, the inclusion of outside directors on the board of a family business is an important
mechanism and could limit managers’ self-serving behaviour where the managers and the owners have conflicting
goals. It should be kept in mind that family-business owners are well aware of the unique competitive challenges they
have to face.
3) The strategic perspective: competitive challenges faced by the family
The following are some of the challenges that family business owners or next-generation members have to face:
Shrinking product life cycles require companies to innovate and adapt more.
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