Family Business 4th Edition Solution
Section 2
Chapter and Lecture Notes
Chapter 1 The Nature, Importance, and Uniqueness of Family Business
Learning Objectives
Part 1 of the book (Chapter 1) encompasses a definition of the form of enterprise referred to as family business. “Family business” includes some entrepreneurial, 100% family-owned, and publicly traded but family-controlled companies. A theoretical perspective of family businesses is offered. Family dynamics and ownership of the family business are addressed in Chapters 2 and 3.
Part 2 (Chapters 4 and 5) address the succession process. Part 2 also discusses leadership imperatives for key actors in business survival and growth: the CEO, the CEO spouse, and the next-generation successor(s) to the CEO. Their leadership initiatives, actions, and behaviors are central to the strategic task of business continuity.
Part 3 (Chapters 6 through 13) presents a collection of best management, family, and governance practices that research and the family-business literature have highlighted as most significant in promoting family-business continuity from generation to generation. The future of family-owned and family-controlled companies depends on the effective planning and implementation of a variety of these best practices.
Chapter 1 shows the importance of family businesses to the free economies of the world. Family businesses represent the primary engine of economic growth and job and wealth creation. This chapter also discusses how, being unique in their attributes, family businesses are unique in their challenges and opportunities.
Four theoretical perspectives that dominate the study of family business are discussed: systems theory, agency theory, resource-based theory, and stewardship theory. In the systems theory approach, the family enterprise is modeled as comprising three overlapping, interacting, and interdependent subsystems of family, management, and ownership. The joint optimization of these subsystems is discussed as the opportunity for significant adaptive capacity and competitive advantage by the firm. Agency theory argues that the owner-agent overlap in a family company presents some cost reduction opportunities but also highlights some agency costs that are unique to family firms; for example, CEO entrenchment, inability to manage conflict, and the potential for risk-aversive and self-dealing behaviors. Management and governance practices that reduce the likelihood of incurring these agency costs are discussed. Resource-based theory holds that competitive advantages derive from core competencies that are the result of the unique overlap between owners and managers, between family and business. Speed to market, long-term investment horizons, product differentiation through high-quality/service strategies, and reduced administrative costs are some of the often-seen advantages. They are the result of concentrated ownership, family unity, shareholder loyalty and patient capital, company size, strategies that focus on proprietary products or niche markets, and the transfer of skills and knowledge across generations. The unique attributes and core competencies of family enterprises enable them to turn these resources into competitive advantages.
Stewardship theory argues that founding family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own personal well-being. Its continuity is often deemed a collective responsibility of family members.
Discussion Questions
Agency theory argues that the owner-agent overlap in a family company presents some cost reduction opportunities but also highlights some agency costs that are unique to family firms; for example, CEO entrenchment, inability to manage conflict, and the potential for risk-aversive and self-dealing behaviors. Management and governance practices that reduce the likelihood of incurring these agency costs are discussed.
Resource-based theory holds that competitive advantages derive from core competencies that are the result of the unique overlap between owners and managers, between family and business. Speed to market, long-term investment horizons, product differentiation through high-quality/service strategies, and reduced administrative costs are some of them. They are the result of attributes such as concentrated ownership, family unity, shareholder loyalty (patient capital), company size, strategies that focus on proprietary products or niche markets, and skill/knowledge transfer across generations.
Stewardship theory argues that founding family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own personal well-being. Its continuity is often deemed a collective responsibility of family members.
The Binghams and the Louisville Courier-Journal Companies case is an excellent example of the vulnerabilities that are unique to family-controlled corporations on the basis of blurred boundaries between family, management, and ownership. Quite the contrary is the case of another media firm, The Ferré Media Group. The Ferré Media Group case highlights the unique resources or core competencies that enterprising family members have been able to parlay into competitive advantages across several generations. It is a centennial family company and a great family business. The Binghams and the Louisville Courier-Journal Companies case is brief and may be assigned to be handed in as one- to three-page written paper or used exclusively for class discussion in conjunction with the 60 Minutes video interview of family members by Diane Sawyer. The Ferré Media Group case is longer and along with The Vega Food Company case, can be used to highlight the unique strengths and special vulnerabilities of family firms. See Section 3 of the Instructor’s Manual for additional information on all of these cases. The small family business cases in Part I of Family Business, 3e may be more appropriate to highlight the idiosyncrasies of family firms if a large number of your students come from companies with less than one hundred employees and/or generating under $10 million in annual revenues.
Chapter and Lecture Notes
Chapter 1 The Nature, Importance, and Uniqueness of Family Business
Learning Objectives
- To introduce the concept of family business and its theoretical roots.
- To discuss the impact of family business on economic activity worldwide.
- To promote understanding of the unique assets and vulnerabilities of family enterprises based on their unique attributes.
Part 1 of the book (Chapter 1) encompasses a definition of the form of enterprise referred to as family business. “Family business” includes some entrepreneurial, 100% family-owned, and publicly traded but family-controlled companies. A theoretical perspective of family businesses is offered. Family dynamics and ownership of the family business are addressed in Chapters 2 and 3.
Part 2 (Chapters 4 and 5) address the succession process. Part 2 also discusses leadership imperatives for key actors in business survival and growth: the CEO, the CEO spouse, and the next-generation successor(s) to the CEO. Their leadership initiatives, actions, and behaviors are central to the strategic task of business continuity.
Part 3 (Chapters 6 through 13) presents a collection of best management, family, and governance practices that research and the family-business literature have highlighted as most significant in promoting family-business continuity from generation to generation. The future of family-owned and family-controlled companies depends on the effective planning and implementation of a variety of these best practices.
Chapter 1 shows the importance of family businesses to the free economies of the world. Family businesses represent the primary engine of economic growth and job and wealth creation. This chapter also discusses how, being unique in their attributes, family businesses are unique in their challenges and opportunities.
Four theoretical perspectives that dominate the study of family business are discussed: systems theory, agency theory, resource-based theory, and stewardship theory. In the systems theory approach, the family enterprise is modeled as comprising three overlapping, interacting, and interdependent subsystems of family, management, and ownership. The joint optimization of these subsystems is discussed as the opportunity for significant adaptive capacity and competitive advantage by the firm. Agency theory argues that the owner-agent overlap in a family company presents some cost reduction opportunities but also highlights some agency costs that are unique to family firms; for example, CEO entrenchment, inability to manage conflict, and the potential for risk-aversive and self-dealing behaviors. Management and governance practices that reduce the likelihood of incurring these agency costs are discussed. Resource-based theory holds that competitive advantages derive from core competencies that are the result of the unique overlap between owners and managers, between family and business. Speed to market, long-term investment horizons, product differentiation through high-quality/service strategies, and reduced administrative costs are some of the often-seen advantages. They are the result of concentrated ownership, family unity, shareholder loyalty and patient capital, company size, strategies that focus on proprietary products or niche markets, and the transfer of skills and knowledge across generations. The unique attributes and core competencies of family enterprises enable them to turn these resources into competitive advantages.
Stewardship theory argues that founding family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own personal well-being. Its continuity is often deemed a collective responsibility of family members.
Discussion Questions
- What is a family business?
- What makes a family business unique?
- The presence of the family.
- The owner’s dream to keep the business in the family—the objective of business continuity from generation to generation.
- The overlap of family, ownership, and management, with its zero-sum propensities in the absence of firm growth.
- The unique sources of competitive advantage derived from the interaction of family, management, and ownership, especially when family unity is high.
- What are four primary theoretical perspectives on family business?
- What does each theory contribute to the understanding of family business?
Agency theory argues that the owner-agent overlap in a family company presents some cost reduction opportunities but also highlights some agency costs that are unique to family firms; for example, CEO entrenchment, inability to manage conflict, and the potential for risk-aversive and self-dealing behaviors. Management and governance practices that reduce the likelihood of incurring these agency costs are discussed.
Resource-based theory holds that competitive advantages derive from core competencies that are the result of the unique overlap between owners and managers, between family and business. Speed to market, long-term investment horizons, product differentiation through high-quality/service strategies, and reduced administrative costs are some of them. They are the result of attributes such as concentrated ownership, family unity, shareholder loyalty (patient capital), company size, strategies that focus on proprietary products or niche markets, and skill/knowledge transfer across generations.
Stewardship theory argues that founding family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own personal well-being. Its continuity is often deemed a collective responsibility of family members.
- What is the economic impact of family businesses? How important are they to economic activity, wealth creation, and job creation?
- Constitute 80–98% of all businesses in the United States and the rest of the free economies.
- Generate 64% of the GDP in the United States and more than 75% in many other countries.
- Employ 85% of the private sector S. workforce and more than 85% of the working population around the world.
- Created 86% of all new jobs in the United States in the last two decades.
- There are 17–22 million family-owned businesses in the United States.
- Approximately 35,000 family businesses have annual revenues exceeding $25 million.
- 35% of S&P 500 companies and 60% of all publicly-held U.S companies are family-controlled.
The Binghams and the Louisville Courier-Journal Companies case is an excellent example of the vulnerabilities that are unique to family-controlled corporations on the basis of blurred boundaries between family, management, and ownership. Quite the contrary is the case of another media firm, The Ferré Media Group. The Ferré Media Group case highlights the unique resources or core competencies that enterprising family members have been able to parlay into competitive advantages across several generations. It is a centennial family company and a great family business. The Binghams and the Louisville Courier-Journal Companies case is brief and may be assigned to be handed in as one- to three-page written paper or used exclusively for class discussion in conjunction with the 60 Minutes video interview of family members by Diane Sawyer. The Ferré Media Group case is longer and along with The Vega Food Company case, can be used to highlight the unique strengths and special vulnerabilities of family firms. See Section 3 of the Instructor’s Manual for additional information on all of these cases. The small family business cases in Part I of Family Business, 3e may be more appropriate to highlight the idiosyncrasies of family firms if a large number of your students come from companies with less than one hundred employees and/or generating under $10 million in annual revenues.